Q1 2023 Farmland Partners Inc Earnings Call
In the markets generally.
I won't talk much about the turmoil in the market generally because they are all of course living it.
But on the farmland side bar.
Arms are actively being bought and sold every day.
Farmer profit is high.
Lenders are lending on farms.
And our assets are highly liquid and highly value.
As the sales we've made in the last month and a half or so clearly show.
Farmland as an asset class has always been and frankly always will be an asset class where roughly two thirds of the return.
Comes from appreciation.
And one third comes from the current yield.
It appears to us that the market only values us based on that current yield and that is a deep mistake.
We will continue to sell farms at very high prices buyback, our stock and pay down debt.
Stock is trading at a substantial discount to what it's worth.
It appears to us that the market values our assets at about one 1 billion.
The private market values, our assets at approximately one 4 billion that difference.
Is what has created I think.
Huge discount in our stock.
The kinds of assets, we're going to sell.
Really a function of our long term view of appreciation.
And yield on those assets.
We are if we think that a set of assets does not have as strong a return profile going forward as other assets in our portfolio.
We will look to sell those assets. If we have strong offers as a business. We've always said that we're not emotionally tied to any farm. So if someone makes a offer you can't refuse even for a farm we love we would of course selling.
But generally speaking we are trying to trim from the portfolio. Those farms that we think will not appreciate as rapidly in the future as the other assets we own.
Related to that is that this process will lead us to probably lighten up on farms that have long term water risk.
<unk>.
So what we've done.
So far as we have.
Sold approximately.
$10 million.
Farms that the closings have already occurred on.
We have $42 million of sales under contract.
And we have approximately $40 million slated for auction this.
Spring and summer.
These sales are all occurring at very strong gains.
Compared to what we have paid for those farms.
The proceeds will go to pay down debt and repurchase stock.
To date, we have bought back about two 6 million shares at an average price of $10 33.
We will continue to buy back stock until we have closed the gap between what we believe is the fair value of our stock.
And the.
Sure.
And the price it is trading at.
So with that I will turn the call over to Luca fabbri to make some additional comments.
Thank you Paul.
Want to spend a couple of maintenance kind of drilling down a little bit further and something that's already kind of mentioned in passing specifically.
Agriculture in farmland markets in particular are really kind of marching to a different drummer and in general and we have seen these specifically in these environments.
As we look at on an agenda on markets and we see a lot of turmoil a lot of uncertainty.
Culture and farm economy are incredibly strong the USDA projects 2023 to be.
The second best year ever in terms of farmer profitability looking specifically a row crops. One specific benchmark that is widely used in the industry.
To predict profitability for row crop farmers is the spring pricing for crop insurance.
And that was set at the second or third the highest level ever for both corn and soybeans in this in the context of yields per acre continuously going up thanks to technology and agricultural practices. So revenue for farmers is definitely going up on the permanent crops as it will be more difficult to make a widespread.
Statements about the.
The overall health of the farm economy, because of the huge diversity of crops that we see there.
But specifically as part of our portfolio is concerned there's been a lot of uncertainty about specifically the impact of flooding and precipitation in California and as far as our portfolio is concerned we haven't seen so far any widespread damage, albeit we're monitoring pretty closely the situation as the.
Snow pack in the mountains is melting.
On the farmland market specifically.
Prices are and seen significant if not blistering appreciation in the last.
Given a half to two years, so they continue to be very strong.
The appreciation itself after the huge gains that we've seen has slowed down or may be flattened.
After the steep increases we are seeing transaction volumes slowing down a bit.
Mostly because there is a scarcity of quality assets for sale whoever wanted to sell a farm pretty much as sold it already in the last couple of years because of the high prices and therefore, the markets Athene down a little bit.
Another important things that we wanted to point out is that the specialist lenders operating in this market are very much open for business.
So not only real estate transaction volume kind of more.
Markets are very healthy, but even the credit markets are very healthy. This is frankly similar to the situation that we saw in 2008, when the overall real estate lending.
<unk> was completely frozen except in agriculture.
It was absolutely business as usual so it's really what's what's impacting us in our stock price right now, it's mostly macro factors.
Interest rates of course of that impacting also specifically our P&L, even though deleveraging industry wide is in the low teens and therefore, it's really not affecting.
The farm economy, very much and the overall market turmoil with bank failures and global uncertainty and so on so forth.
As Paul said I'm, not going to rattle down the list you're more than familiar with that.
So in these in these orbital kind of scenario, where we see a very strong farm economy, and pharma markets and uncertainty in the market turmoil, we're very committed to creating value for our shareholders effectively arbitrage between that healthy active and liquid private asset market and the public stock market that is very much.
In turmoil and a little confused.
With that I will turn now the call over to the company's CFO James Gilligan for his overview of the company's financial performance James Thank you Luca.
Going to cover a number of items today, including summary of the first quarter 2023 review of capital structure and interest rates detailing revenue buildup and updated guidance for 2023.
I'll refer to the supplemental package in my comments as a reminder, the supplemental are available on the Investor Relations section of our website under the subheading events and presentations.
Page numbers one through nine contains the press release and related financial information in page number 10 to 19 contain the supplemental information.
First I'll share a few financial metrics that appear on page two for.
For the three months ended March 31, 2023 net.
Net income was $1 7 million compared to $1 1 million or 22, an increase of <unk> 6 million.
Net income per share available to common stockholders was <unk> <unk> compared to zero cents for 'twenty, two and increase the <unk>.
<unk> was $1 6 million compared to $2 1 million for 'twenty, two a decrease of <unk> 6 million.
<unk> per weighted average share was <unk> <unk> compared to <unk> 22, a decrease of one.
We will review revenue changes in a couple of minutes, but if youll turn to page five I'll make a couple of comments on the expense side.
Q1, 2023 operating expenses were lower by $1 7 million compared to 2022, driven by lower cost of goods sold.
General and administrative expenses and legal and accounting expenses.
It should be noted the property operating expenses were higher in Q1 2023 compared to 2022, driven by a onetime property tax expense of approximately $150000.
That taxes reimbursed by the tenant increasing tenant reimbursements by that same amount.
And other income and expenses gain on dispositions was up $1 2 million in Q1 compared to 2022, while interest expense was $1 $1 million higher in Q1 compared to 2022 due to higher rates.
Next I'll Skip ahead to page 12 to make a couple of comments about our capital structure.
Total debt at March 31, 2023 was approximately $443 6 million.
Fully diluted share count as of last Friday April 28 was $53 1 million shares.
If you look at the table on the bottom of the page number 12 between the Metlife credit facility and the Rutledge Farm credit mid America credit facility, we had undrawn capacity in excess of $159 million at the end of the first quarter.
As discussed in previous quarters $174 million of Metlife debt has or had rate resets in 2023. These would be low numbers 14567 10 and.
In the first quarter, we renegotiated rates for loans, representing approximately $109 of that $174 million.
As shown in the table in.
In the second quarter, we have agreed to reset the rate on the $15 $7 million Metlife low number seven to $5, 87%. This goes into effect the first week of June .
The reset loans also have increased flexibility to prepay without penalty up to 40% of original principal balance per year.
We have approximately $49 million under loan number 10 that will reset in the fourth quarter of 2023.
She also be noted that the Rutledge farm credit line had a decrease in the spread over so for that went into effect April one 2023, the rate decrease from silver plus 195 to <unk> plus 180.
Next I will turn to page 13 to provide an overview of our income statement in 2022, we presented numbers in the category are shown in the top table on page 13, we talked about fixed payments variable payments direct operations gross profit and other items. This is an effort to make the business easier to understand. However, this presentation may have made it a little difficult to model the business.
Because it did not detail out the building blocks that comprised the different categories.
The second table on page 13 does just that it shows the building blocks for both the GAAP revenue line items and the supplemental categories.
Reading down the column you can see what makes up the supplemental categories everything across the road you can see what makes up the cap line items.
Page 14 shows these building blocks once described on 13 for 2022 in the first quarter of 2023 with comments at the bottom to describe the differences between the periods a few points to highlight are.
Fixed farm rent increase.
Wired properties and renewed leases between the periods.
Increase with disposition of farms between the periods.
Solar increase in 2023 compared to 2022 is a large project in the state of Illinois commenced its construction phase late last year.
Tenant reimbursements increased what that onetime property tax assessment of $150000 and the related tenant reimbursement that occurred in the first quarter.
In the fourth quarter of 2022, we acquired land and buildings for for agricultural equipment dealerships in Ohio under the John Deere brand, the accounting treatment of classifieds, those acquisitions and financing transactions. So they appear on the balance sheet as loan and on the income statement as interest income. This accounts for the increase in interest income in the first quarter.
2023 compared to 2022.
Variable payments were down <unk> 5 million due to lower performance in grapes in row crops.
Caused primarily by lower yields during the Q4 harvest period on particular farms, which was largely expected and a topic we covered on the last earnings call.
<unk> operations as the combination of crop sales crop insurance and cost of goods sold altogether was down $1 1 million in the first quarter of 2023, because of lower crop insurance payments and lower crop sales compared to 2022, largely et cetera.
Other items decreased <unk> 3 million due to lower auction in brokerage activity at our subsidiary Murray wives associates in the quarter compared to 2022. It should be noted that there was a large transaction, where our colleagues did a great job with the seller decided not to sell that accounts for nearly all of the shortfall between the periods.
On the next page page 15, we have the outlook for 2023 using those same building blocks described on page 13 on the revenue side.
Assumptions are listed at the bottom of the page and I'll note. Some changes from the projections that we shared back in February .
We sold approximately $7 million of assets in the first quarter and are projecting to sell in the neighborhood of $80 million to $100 million over the entire year as Paul described a few minutes back.
This number is an estimate and actual results may differ.
On the revenue side fixed firm rent has a net decrease of approximately 1% to $1 3 million as a result of the projected dispositions solar wind and recreation of small changes due to potential asset sales and updated views on solar options.
There is an increase in tenant reimbursements due to that tax reimbursement that we talked about earlier.
No changes on the direct operations revenue items at this time.
Other items decreased compared to last quarter due to the lower revenue from auction and brokerage fees in the first quarter of 2023.
Cost of goods sold is projecting a little higher due to updated expenses provided by third parties on properties under direct operations.
On the expense side property operating expenses are increasing due to that same onetime property tax item that we mentioned a couple of times.
No changes to general and administrative expenses at this time.
Legal and accounting decreases with lower spending than we saw in the first quarter.
And interest expense decreased slightly with the combination of projected changes in debt balance as a result of the potential asset sales plus updated pricing and updated forward curves.
We're estimating the last remaining interest rate reset for 2023 that Metlife loan number 10 prices in the five 5% to five 6% range.
Weighted average shares decreases with projected share buybacks.
This results in lower <unk>, and also lower weighted average share count generating <unk> <unk> per share in the range of 17 to 25 slightly.
Slightly higher than back in February .
This wraps up my comments for this morning. Thank you all for participating operator, you can now begin the Q&A session.
Thank you to ask a question. Please press star followed by one on your tire. Thank you Pat now if you change your mind and Richard draw. Your question. Please press star followed by case.
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The first question today is from Rob Stevenson from Janney. Please go ahead.
Good morning, guys.
Paul Luca.
411 farms for $42 million under contract what is expected to close is that a second quarter thing is thats ratably throughout the year, how should we be thinking about that.
The bulk of those will be in the second quarter several drift over into the third quarter.
Okay, and then what about the auction process on those other farms.
While the auction process.
Second and third quarter.
Okay.
When you think about that sort of 80 million ish and whole for those dispositions focused on the tree and some of the other specialty crops that you've talked about the volatility in reducing your exposure to or are these mainly Midwest row crops how.
Should we be thinking about that in terms of what the portfolio looks like going forward following the sales.
One thing we won't start doing to keep people like you informed and up to date is as we make closings. We may not do it on every transaction because there was a lot of funds towards re closings in a week, maybe but we will put out a press release. So you can clearly see with farmers.
Sold.
Finally house.
Early on when it closes but to your broader question. Most of these sales have been row crop.
Not in the Midwest row crop in other regions of the United States.
The auctions are going to be a lot of our eastern Colorado assets, and some Nebraska assets, where we have water risk.
And then we haven't yet, but we may consider.
Selling some of the <unk>.
Specialty crops for the reasons, you and I talked about.
You mentioned, a second ago as well as the fact that of course, those things, California has long term water risk.
On many of the assets.
Okay.
And James I mean, with some of these sale proceeds if youre going to pay down debt do you just pay down the farmer Mac and Rutledge facilities is there other stuff that you would hit on before.
Before that how do you how do you think about the priority if youre going to wind up paying.
Paying down some debt as to what segments of that that is going to wind up being.
Yes, it's a good question I'd say in general we're going to pay down the highest cost debt first today that would be in some of our floating lines.
Yes.
From kind of mid America line.
Farmer Mac line next we also have the ability to make repayments on our Metlife lines. Those that we've reset in 2023, we can repay about 40% in any one calendar year and the balance we can repay about 20% in any one calendar year.
One of the loans allows a higher percentage, but that's sort of a good rule of thumb. So we have a good amount to sort of.
As a use of proceeds that we could go after on that on that side.
Okay and last one for me.
Any update in terms of timing and or events with the Sabre point litigation.
I don't think there's anything to report.
Sure.
We're on appeal and waiting.
No news no real activity in that in the last several months.
Okay. Thanks, guys I appreciate the time this morning.
Yes.
The next question is from Wes Golladay from Baird. Please go ahead.
Hey, good morning, guys.
You talk about how you balance scaling the business versus buying the stock at a discount is a limit to how much yourself.
Yes, I mean, obviously, it's a balance but but.
The way I look at it.
Is the cheapest farm land on the planet today is our stock.
And we're in this to make money for our investors and so.
If I can buy our farms.
Sure.
Call it.
30, <unk> less than they're worth.
And I can.
On a dollar.
Third, 30% discount kind of numbers.
Why shouldn't we.
That business is buying farmland inexpensively and the cheapest farmland out there as our stock by miles.
That's what we're really doing as far as your question look we're not trying to go out of business and the team here EMEA in particular, we built this business we founded this business.
But we're not too proud to.
<unk>.
Aggressively buyback our stock if we think it is trading at a discount and as Luka said.
It's frankly trading at this deep discount in our opinion for two reasons. The first is a general market environments.
And the second is the market appears unwilling to accept that appreciation is an incredibly big driver of farmland value and farmland investing.
And so we're.
We're demonstrating that that appreciation is real and that it's there.
We're starting to signal to be Frank in this phone call loud and clear that our stock is deeply undervalued and we're out there putting our money where our mouth is on that point.
Got it and then when you look at the assets that Youre looking to sell are any of them at trough cash flows where maybe we're not going to lose their already trade at low cap rates, but even lower cap rates than normal just because the business was maybe under a little bit of pressure for some of the farms.
Well, obviously when I said, we focus on farms in which the long term and what I mean by that is both increased rent opportunity and increased depreciation opportunity, where we think is less it's less than it is in other places in our portfolio obviously.
<unk> lower cap rate assets.
Often our war on that list, but it is an important is an important piece of this that's for everybody recognized.
In general the lowest cap rate assets in the portfolio.
Illinois titled forms the core of the corn belt farms.
Are the highest return total assets we own.
You can combine appreciation that region of the country those assets have gone up.
25% the last couple of years.
And so it's not just the cap rate thing that's the point, we want to make but you're right there'll be there'll be a lot of there'll be more lower cap rate assets I think higher.
But it is total return.
Is what drives this asset class.
It's what drives.
Not just cap rate.
Because.
I just didn't understand the problem with GAAP recurring.
Yeah, the cap rate thing just to be blunt.
The highest cap rates in the asset class or on our lowest quality properties.
That's just how it works and we don't want to chase the lowest quality properties really chase the best properties.
So the other thing Thats important grass.
Is that what's really happening here is the market's valuing some asset.
Call It a four cap and we're selling it at a three two or something like that it's different on every farm, but that is the crux of what's happening public.
Public market values us.
Much theres some sensible reasons for this the overheads of being a public company and all of that.
GAAP is just way too wide.
And we are taking.
We're taking.
That is an opportunity.
Instead of just sitting on our hands and being frustrated about it although we're frustrated about it as well.
But we're doing something about it.
Got it and then maybe if you can just give us your view on any do you expect any weather related impacts this year, whether it would be a drought heavy snow snow pack in California, maybe could actually be a beneficiary of some crops are out of service in your aircrafts can do while your farmers can do well.
Your view on that.
So I am not going to predict the weather on this on this phone call except to say the following first let's start with California.
The incredible amount of rain and snowfall the California received in the last year is a great thing.
There will be highly localized negative events for certain people that.
Natural disaster.
We should all feel bad about.
But the state of California is not going to flood the.
Hyperbole in the press is ridiculous.
A ton of snow and a ton of rain is a really good thing for California in every way agriculture.
Yards greener.
<unk> for drinking water are more full than they've been in years. This is all good news don't get sidetracked by somebody giving you a headline in the popular press and like I said I mean.
Sympathy to all the people that have a localized flooding event because there will be some.
We think we are pretty safe on our farms.
Then to the more general things of the drought on the weather the drought continues in.
Parts of the western grain belt.
Western Kansas to some degree Eastern Colorado, Texas Panhandle, there's been more rain than theres been quite a few years here in the last few months and Thats good and so hopefully.
That's going to be the <unk>.
<unk> global weather shifts to El Nino.
Are going to make.
Make some improvements we think.
Rest of the country is off to a pretty good planning start so so on and so forth. So and obviously, we're mostly a cash rent in the <unk>.
In the row crop regions. So we're not directly affected by any by weather.
In any given year, but we want our farmers to succeed of course.
So we think its setting up to be a pretty pretty good year across the regions from a weather perspective, so it did predict whether even though.
[laughter].
Yes, thanks for that I appreciate that would be from California, and it is nice to see the graph screen now.
Thanks for that.
Yes.
The next question is from Craig Sarah from B Riley Securities. Please go ahead.
Yes.
Hey, good morning, guys.
Paul I know you achieved 16% rent growth on your fixed cash rents in a row crops last year, but.
I think food CPI has sort of flattened out here in the first quarter.
Lagging indicator of course, but can you talk about the rent growth on leases that rolled over in the quarter and maybe your expectations for the remainder of the year.
Yes.
Yeah, Hey, Craig so I'll take that.
Remember the our rent roles our rent lease duration is about three years. So now we are looking at rent leases that loss to renewed.
Two years ago for our leases starting at the beginning of 2024. So there has been quite a lot of appreciation in farmland values that has been a lot of yield increases that happened in the meantime, so we are expecting these to be still a relatively strong.
Rent.
Lease renewal cycle.
We haven't really started.
And kind of full depth because again, we are looking at Liza starting now in the beginning of 2024.
Yes, let me just add a couple of things that we've got.
Round numbers.
10% rent increases on the row crops up two years ago, something that bracket, maybe 10 to 15 that kind of bracket. We've got 15 16 in that year, we just.
Close to closed out and now in the rent cycle. We're in right now I think we will still get strong increases.
No there'll be quite as strong as the 16% you referred to Craig and the reason for that is as Luca alluded to.
The year.
<unk>.
Sort of vintage of leases, we're renegotiating right now some of them were still negotiated under a relatively tough farm economy. So they didn't get the big increase was three years ago and some of the ones. We negotiated later in that year actually had pretty strong increases. So we're kind of working off a higher base on an average basis.
Then we have been for the last couple of years. So I still like will get strong increases, but may not be quite to the level, we had last year.
Yes.
Got it and understanding that Youre still kind of early in the process here.
Are you as you discuss things with your tenants are they looking maybe at any shift in maybe a rising amount of participating rents or are you expecting things to be relatively constant.
No I mean, the structure of our lease agreements is really more kind of a regional kind of crop basis. So just the different the different environments.
Different fund profitability really wouldn't drive any changes in structures.
And.
We are on the row crop side overwhelmingly a cash rent model and we want to stay that way.
And.
For that we do that for two reasons number one is just stability and the simplicity of managing the business.
Standpoint of our accounting team and our back office efforts on the operation side cash rents are way more efficient and easier to manage.
But the second thing is as we think that in the marketplace.
Verbal long term risk adjusted returns to using our cash rent model are higher than using some sort of flex model in other words, you don't get enough on the upside to make up for what you have given on the downside. So we drive our cash rent model I think James is something that yes, I'd just add in our cash rent business, we generally.
Youre paid 50% to 100% of that rent before planting so kind of Q1 time frame, whereas if you are participating are getting variable rent that would by definition be after harvest kind of on the backend in Q4, so from a cash flow perspective de risking perspective, it's a very nice feature to be de risked on a meaningful portion of our rent very very earlier in the year.
Right. Thanks, I appreciate that just one more for me.
Through the auction process.
Roughly $40 million of assets is that something that <unk> is going to handle or is that.
Yes, the only to third parties and is that included in guidance if it does run through NWA.
So whenever we are doing so number one.
Answer the question a more broad sense.
We are not incurring very many expenses.
<unk> brokerage services in Hawaii, and these asset sales that will be obviously, some but many of these transactions are occurring based on the relationships.
People here in farmland partners have with potential buyers of assets.
Everybody in the market.
On the specifically on the auctions <unk> is handling the Nebraska asset sales.
For Us and then they are partnering with some people on the Colorado asset sales.
We worked with in the past.
And it's really kind of market dependent it's all about the depth of MW ways, not only licensing but experience.
Given the state.
In terms of how they're how they're involved as far as the guidance question goes I'm going to turn that over to.
Resolved.
It's all kind of consolidated so im not sure.
James Yes, correct, Craig and those numbers were considering for kind of guidance, but those are really sort of external revenue sources. The internal revenue would be consolidated out.
Actually on a cash basis, we are making sure to pay our colleagues arm's length rent.
Would receive in any other type of transaction to make sure. We're we're complying with all the necessary rule. So.
But yes, as you think about it that would be truly kind of third party fees.
Fees that would flow through in the projections, we've got so far and we'll continue to update that as we go throughout the year and see how the pipeline looks on their side.
Okay. Thanks I appreciate it.
As a reminder, if you would like to ask any further questions. Please press star followed by one on your tenant. Thank you Pat now.
It appears we have no further questions. So I'll hand back to the management team to conclude.
Thank you. We appreciate your interest in our company and look forward to updating you on our activities and results in the coming quarters have a great day.
This concludes today's call you may now disconnect your lines and enjoy the rest of your day. Thank you.
[music].