Q2 2019 Earnings Call
Good day and welcome to the farmland partners incorporated second quarter 2019 earnings Conference call. All participants will be in listen only mode. So you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity tax questions to actually a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note that this event is being recorded I would now like to turn the conference over to Paul Pittman, Chairman and CEO . Please go ahead.
Thank you Chuck and good morning, and welcome to farmland partners second quarter, 2000, or 19 earnings call and webcast.
We appreciate you taking the time to join US for these calls we see them as an important opportunity to give investors additional information about our company beyond that and then a more interactive storm that isn't in the public filings and the press releases.
Please refer to the Investor Relations section of our website.
Farmland partners Dot Com, you will see a Q2 2019 supplemental package, which you may find helpful.
Oh the link for the presentation is directly below the webcast link and it is also posted under presentations section of the Investor Relations portion of our website.
With me. This morning is Luca Fabbri, the company's Chief Financial Officer, I will now turn it over to Luca for some customary and preliminary remarks.
Thank you Paul and thank you to all who are listening to this web cast live or recorded that the press release announcing our second quarter earnings was distributed yesterday evening every play of this call will be available. Shortly after the conclusion of the call through August 20, 129 pm.
The phone numbers to access the replay are provided in the earnings press release for those who listen to the rebirth <unk> broadcast of this presentation. We remind you that the remarks made herein as of today August seven 2019 and have not been updated subsequent to this initial earnings call.
During this call we will make forward looking statements, including statements related to the future performance of our portfolio I, what I didn't if I didn't potential acquisitions and dispositions impact of acquisitions dispositions and financing activities as well as comments on our outlook for our business trends in the broader agricultural markets.
We will also discuss certain non-GAAP financial measures, including net operating income at the FFO adjusted FFO EBITDA reached an adjusted EBIT debris 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 second quarter earnings, which is available on our website Www Dot pharma partners still call him and he is furnished as an exhibit to our current report on form 8-K dated as of yesterday.
Listeners are cautioned that these statements are subject to certain risks and uncertainties many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the risk factors discussed in our press release yesterday after market close and in documents, we have filed with or furnished to yes, you see.
I would now like to turn the call back to our chairman and CEO , Bob Pittman Paul.
Thank you Luca.
So this will be a slightly longer presentation than I normally give I'm going to discuss around six separate topics.
Starting with general comments on the AG economy.
The U.S.D.A. land value survey that came out yesterday.
Some specific performance metrics.
Asset sales.
Share repurchases and wrote a fortune a litigation related matters.
So let me jump right into it.
The General AG economy continues to have.
Fundamental headwinds, but I am frankly quite optimistic about what is going on in our company and what that effect will be the ultimate long term shareholder value.
So turning to really the key things going on in the AG economy generally.
Let me start by saying this is what a down cycle looks like.
<unk> farmland investor.
That's not to suggest this is a great time.
But what it proves is the fundamental resilience of the asset class.
The AG economy is quite stable because its based fundamentally on weighing on land scarcity and growing food demand that even with the trade war and other significant issues affecting agriculture, we're still seeing modest depreciation.
In farmland values and wall challenging we're seeing our tenants perform reasonably well.
So the trade war, specifically is not good for the former profits it is affecting us to some degree, particularly through our crops shares.
Surprisingly some of the negative effect is showing up significantly in nut crops almonds, pistachios and walnuts. They are viewed somewhat as luxury goods in China, so less likely to be imported in the trade war environment.
The recent announcement of no more AG products to China from the United States is certainly not good news.
But fundamentally.
U.S. production agriculture will weather that storm some of the pain will be felt by landowners.
But it.
But as I said this is what a down cycle looks like.
And we talk later about asset sales there would be few industries, where you could be at this place in the market cycle and still be able to sell assets at substantial premiums the purchase price.
This years the other thing that's in the news a great deal about the AG economy is of course, the was excess rain and now to some degree drought the weather related impacts on the U.S. crop of corn and soybeans in particular.
I have traveled this summer in seen virtually every one of our farms in the last 60 days.
And these.
And what the situation is out there in my opinion is that this is going to be a very short crop compared to what the expectations would have been.
When the crop was about to be planted back and say late April .
However, it is incredibly difficult because the crop is so uneven even within any given field.
To get a true understanding of how bad things will turn out to be now when I say bad I'm talking about the yield on the <unk> on the far most of these farmers and certainly most of our tenants have good crop insurance.
So financially they will be okay.
But I think we're going to end up with a relatively short crop of both corn and soybeans and probably see commodities prices appreciate.
What we're seeing in the commodities markets on the Chicago Board of trade today, though.
He is a recognition of the difficulty of judging the size of this crop balanced against the demand destruction occurring from the trade War and.
The demand destruction occurring because of increased crop prices.
I think in the end or the the supply side shortage will dominate the markets and it will be bullish for corn and soybeans, but there is certainly no certainty.
The reason I walk through this is that the farmers frankly need to see some price increase.
Come their way.
They have had multiple years of surplus which has depressed prices I think walt painful for individual farmers.
A short crop year will for the industry as a whole.
Ah turn out to be a reasonably positive.
Thanks.
If in fact, we could get the trade war settled it would be certainly positive for agriculture. The you know the trade war is about way more than just agriculture, which of course makes it so complicated.
To solve.
Moving forward to the land values, a U.S.J. land value survey that just came out yesterday.
Let me give you a couple of key statistics for those of you listening who own the preferred security the preferred B security. There was a press release issued yesterday with the exact mechanics of how that.
Instrument will will will be paid out related to this U.S.D.A. land value survey.
I'm talking about the survey overall looking at farm real estate, which is the metric we pay attention to the U.S.D.A. reports said that farmland values have increased 1.94%.
From June of 2018 to June of 2019.
Looking only at this the 17 states the F.P.I. owns farmland in.
We have seen it go up 2.66%.
Looking at individual regions, where we own quite a bit of farmland.
The southeast is up slightly with a range of negative 1.1% in Georgia to positive 2.7% in South Carolina.
The Delta, which is Arkansas, Louisiana, Mississippi is up anywhere from 2.2% to 5.1%.
Illinois was flat, meaning no change from the prior year, Nebraska was up 3.6%.
Colorado.
0.6% in California up 7%.
Now.
Don't necessarily expect those appreciation factors to come through directly into our portfolio.
But that is certainly a powerful indicator that adds an inflation hedge even in tough economic times and agriculture land values hold up and continue to gradually appreciate.
If you would.
Moving on then to performance metrics.
About our company.
ER specifically.
The.
There's sort of a as I said there are headwinds in the industry in the industry generally and in RPM now.
But I want to give you a simple way and it's truly an over simplification of a way to think about.
Our operating P. and L. for the core.
Because there are clearly quite a bit of changes in that you know.
And of course, a negative five cents a share FFO.
So this this again I want to emphasize this is an oversimplification, but it's I think important particularly for the equity analysts to think about at least start by thinking about it. This way and then add the detail as you study the <unk> the results we reported.
So we've made asset asset sales of around five and a half a percent of the portfolio.
[noise] revenues have gone down about 4.1%, which makes sense. We have sold a significant piece of the portfolio revenues are therefore going to decline and they've declined slightly less than the amount of assets. We've sold which is because we have on average sold assets at the lower end of our cap rate.
Structure within the company.
So operating income if you adjust out for the about a million dollars of excess legal costs related to the road a fortune a litigation operating income came down about 4.5% more or less in line with the decline in revenues.
And they have that FFO would have been about three cents higher.
Now that's clearly as I said, an oversimplification, but I think it's important to separate sort of the one time events from the underlying performance of the of the farms and the asset.
And to just start with sort of that methodology when thinking about.
A company performance.
I do want to make one additional cautionary note because I already read something early this morning.
On the Internet.
That our net income jumped from 981000 to 6.5 million is really driven of course by asset sales I read something this morning about the significant increase in net income and yes, we did and a technical sense, but again, that's that's a one time event.
Moving on to a couple of other topics on general softness operating metrics.
Talk just a moment about.
Operating expenses within the company.
We have dropped the run rate costs of the company's administration by over 1 million.
In the past year.
This is largely driven by changes and reduction in personnel.
We have lost a lot of good people.
I hated to see them go we were able to replace with also very good people.
But this is what happens to a company like ours when a stock manipulator like wrote a fortunate and his coconspirators attack the company.
You know and then you get the piling on of the class action lawyers and their unscrupulous shareholder clients and it is truly a difficult challenge inside the company.
The senior management of this company. The section 16 officers are very committed to what we're doing and we're going to see it through.
But I don't I, you know that the key message. There is that we have continued to substantially reduce the overheads of this company.
Through through the the recent timeframe.
Moving on.
We finally are starting to see interest rates move in our favor as you. All know we are reasonably Levered company.
Seeing the interest rate cycle start to turn back downward will be beneficial to the PNNT will the company overtime of course hard to predict.
How quickly that shows up.
But it but it will.
The final operating statistics [noise].
Or or financial statistic, but I want to touch on is that we always talk about the net asset value analysis of the company looking at the valuation of our portfolio from three different metrics.
If you.
Do that today, what you will see is that.
Looking at a cap rate based analysis.
You would see a valuation for a the portfolio that if that is equivalent to approximately.
$15.60 a share.
Looking at the U.S.D.A. valuation methodology and this is the methodology I believe to be the most accurate reflection.
It it would be $14.07 a share.
And looking at book value, you would be at $9.90 a share.
So all three of those metrics have increased in the last quarter substantially.
They are increasing because of the continued stock buyback, we do and because of the general asset value appreciation.
I still think that something around $12 a share is a good.
A place to think about the and a b per share.
Although the continued buybacks have probably move that up.
ER somewhat through the last year or so so it may in fact be slightly higher.
Then.
Then the $12 a share.
Turning then specifically to asset sales.
We we have been quite successful and very active in our asset sales effort.
Let me give you a couple of statistics on those asset sales.
So we at this point have now sold about 67 million of assets.
At a gain of approximately 20% above what we paid for those farms.
None of these assets were assets of the original predecessor, meaning none of them are assets that I and my family contributed to the company at the time of the IPO. These are all assets, where we are measuring off valuations that have occurred since the IPO and in many which was in 2014.
Which and in many cases much more recently.
The lowest return sale was an 8% gain the highest returns sale was up 56% gain.
Smallest sale was about $300000 the largest was almost $19 million.
This is about a 5% to 6% of the total portfolio has been sold.
The Levered I are ours on these assets during the holding period was over 25%.
The narrative promoted by wrote a fortune a a year ago that we cannot achieve values in our asset sales above purchase price.
Was false when he made it I believe he knows it was false when he made it.
And the asset sales, we have done and we'll probably continue to do we will continue to prove that point.
Turning to share read.
Purchases.
We have at this point bought back about 15% of the company.
Approximately 5.7 million shares.
Our share count is now slightly under 32 million shares.
The stock buy backs that have been done on average in the mid sixs per share have probably created about $30 million to $35 million of equity value for the remaining shareholders that would equate to slightly more than one dollar per share.
Which is back to the point I made a few minutes ago, why I think our and Avi per share is probably.
Climbing substantially.
Now turning to litigation related matters.
I would generally never mention.
Hey, they repayments of a modest size alone.
By one of our tenant farmers.
But since the company has been sued.
Over this by unscrupulous lawyers and unscrupulous shareholders trying to take advantage of the rest of you.
I'm going to discuss it in somewhat detail.
Jesse hub, which is the Huff one has been repaid in full.
That we as a company.
Have.
Made a substantial gain from the repayment of that loan.
Principal of the loan was $5.25 million.
Mr. Hofh repaid all interest and all bonus interest and all principle for a total return of slightly more than 8.5%.
This loan was made to Mr. hofh as acquisition financing.
It was refinanced by him at rates much better than the rates, we had given him.
With a traditional lender.
This was a good loan for F <unk> and for the F.P.I. shareholders, Mr or half was not a related party at the time. This loan was made.
This is a very good piece of business.
At this point those unscrupulous lawyers that I keep referring to and those shareholders walking along behind them.
Should drop this frivolous attack on the company, but I doubt that they will.
RF in my opinion wrote a fortune I knew that this was a good loan when it was made.
Since it was secured by real estate.
He knew as he said that Jesse Huff was not a related party.
He wrote that article so he could exit and these clients that work. He is paid to write those articles for could exit from that stock.
At substantial gains and the losses were pushed up on all of the rest of us.
As shareholders today, we have great difficulty continuing to make loans.
Because no tenant wants to be pulled through the mud.
As Mr. Han and Mr. niebur have been related to the loans that we make this is very good business for farmland partners in the past I wish we would continue and could continue to make loans, but frankly, it's very difficult and we're unlikely to make any loans at least in the near future.
Because of the reputation of damage to our company.
Created by our road Unfortunately, and his coconspirators.
Turning to just a couple other matters related to the RF litigation.
If you recall that article.
The headline said that we were at risk of insolvency, well I guess, we know now a year plus later that that wasn't true band and isn't true now.
The best fruit.
That wrote a fortune a is nothing but a shortened distort fraudster is the following.
He and his clients exited their stock positions immediately into the panic created by his fake news article.
I am not someone opposed to legitimate shorting of a stock.
In fact, I think it is important piece of market activity.
But the way you tell the difference between a legitimate short.
And shorten distort fraudster.
Is you see if they hold their position to see that the their point of view come out or do they just exit into the panic created.
By the fake news that they published in this case on seeking alpha well, what we now know is that they exited those positions on the day or the day after the article in the main.
And they did it because they knew the article they wrote was untrue.
RF and his coconspirators engaged in a scheme that's a profit.
From fraud and unfortunately it works.
We continue to be optimistic that we will eventually get financial redress for our shareholders.
I'm going to turn it back over to Luka to go through some key financial statistics and operating statistics related to the company.
[noise]. Thank you Paul spoke mentioned that will just walk through some of the financial highlights the wedding the press release from last night.
Related to the both the <unk> the second quarter of 2019, and the performance of the company year to date.
Total operating revenues were 10.9 million for the quarter 21.8 million for the first half respectively. A 4.1 and three playing fund five degrees or percentage degrees over the corresponding periods from last year.
The major driver of these decreases in operating revenue was the fact that we did sell some assets and therefore those assets don't contribute to our topline anymore and to a much lesser extent difficult operating environment in the U.S. AG economy as a whole.
The operating income for the second quarter of 19 was 4 million for the first half was 8.5 million.
With respect to the 23.8 and a 15.3% decrease over the corresponding periods in 2018.
Besides the decrease in.
Revenue and other major drivers of the decrease in operating income with the increase in.
In nonrecurring legal expenses.
Related to that or the Fortuna shortened to start to pack on the company.
Finally.
Net income.
Was.
Basically they didn't have to go most of all this was a point or $9 per share.
In total net income for the second quarter was 6.5 million at very very significant increase over the same for you. The first 2018 again as Paul mentioned, we caution you that this is really fundamentally driven by nonrecurring gains for the disposition of certain assets.
The Ethel their share for the quarter was negative five cents.
Again influenced by all the factors that I mentioned, whether the duet revenues and open to the incoming in addition to that also by the increase in interest rates.
The during the quarter, we complete the thumb dispositions totaling 29.7 million to be.
Proceeds from those asset dispositions, where fundamentally use by purchasing both common and preferred stock by paying down debt.
And to a much lesser extent.
By making improvements to some of our farms.
We repurchased 12.9 million in shares of common stock during the quarter and half a million in that seems to be participating preferred stock.
We also completed some of the some repurchases after the end of the quarter.
The resulting a fully diluted.
Common share count as of today, it's just been really short of 52 million shares.
This concludes my remarks on our operating performance for the second quarter of 2019. Thank you for your time. This morning, and your interest in farmland partners. Chuck we would like to begin the question and answer session.
We will now begin the question and answer session to actually question. You May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
[noise].
The first question comes from Collin Mings with Raymond James. Please go ahead.
Thank you good morning.
Good morning, Collyn how are you.
Good. Good first question for me. This morning, just as it relates to asset sales can you maybe just provide a bit more color on the depth of the buyer pool, you're seeing as you continue to.
Self arms into the market and then on that front is there a lot of interest in portfolios or is it just one off assets.
Well so the the depth of the market is huge.
It's a big country every region has its own market at different times.
Based on what's going on in that region generally in terms of crop performance price of those crops higher and better use demand for land so on and so forth. It really is a portfolio approach.
In terms of how the country works and how we manage our portfolio.
Most of the buyers will be.
Individual persons or entities not asset managers, not our competitors they will often be.
The best buyers because they are you know if there were an operator.
As one would expect an operating buyer is always a higher price point buyer.
Than a asset manager style balance buyer because there is one less level of fees and expenses in there.
In terms of their return on the property.
So we're we're.
We will continue to opportunistically sell assets at gains.
As long as we've got good use for those proceeds.
To either buy better properties.
In order to re acquire our securities both common and preferred.
The common has been trading at such a deep discount Thats of course been where we've put most of the dollars.
As far as portfolio interest, we do get portfolio interest.
It often comes from.
Frankly, some misinformed person who thinks they can.
Buy assets at a 50% discount because our stock prices so beat up.
And we shut those discussions down pretty quickly because there's there's no need to entertain in that discussion.
We will all make a lot of money and I certainly will as a large shareholder.
If we gradually continue to sell assets if that that's what's required and repurchase securities through time.
But.
No need to the fundamentals of the underlying AG economy are as I said.
Not great, but really not all that bad because the fundamental look for returns to us as a asset holder farmland.
Older are really okay. So hope that helps answer your question.
I understood I think Paul maybe to just to put a finer point on it most of the sales during the second quarter, where that basically to either.
Kind of maybe tenant operators or adjacent farmland owners is that the way we should think about.
No no there was a there was a one of the one of the larger transactions we've ever done was to a.
Higher and better use buyer, who has an interest in doing something different with that property.
Their corporate entity as I've said in the past, we aren't going to do.
Disclose and discuss exact details of individual transactions Thats frankly, our secret sauce.
But.
You're getting you're getting a mixture of buyers in the marketplace.
But most of them most of our sales have been operating sales, but when you get the kind of gain we got on the phone on a few of these transactions, it's likely to be somebody who is going to do something different with the property because that kind of accelerated appreciation isn't normally driven purely by agriculture. Now. The reason you want to own a big portfolio like we do across the country, though is that.
There will be more of those.
Somewhat lucky.
Hits in this portfolio through time.
They come in lots of different ways, sometimes it's a higher and better use buyer.
Sometimes its solar or wind development on a piece of property, we're going to continue to own we've talked about this in the past you may move rents from $250 to $850 an acre on a piece of property, but those those really big jumps.
Our almost always going to be driven by a non AG related.
Event, the AG related appreciation as what the U.S.D.A. is talking about it's been running at 2% a year for a couple of years or so.
But.
That's always going to be the case is going to be kind of close to two inflation for the AG driven appreciation and most times.
Got it okay understood Thats helpful color there.
Moving back to the prepared remarks regarding the owner is a farmland anarchy.
Said something to the effect that will experience some of the pain in the current environment can you maybe just expand on kind of your tenants ability to afford current rents and then a recognizing it will vary by region, but just any color regarding market rents versus in place rents or anything along those lines would be it would be appreciated recognize again that it's going to be some volatile, but the variability depending upon the market.
Yeah. So so first talking about it at the national level I mean, it's a good question.
The.
So let me kind of break it into pieces most of our rents are cash rent so not all but most so in the near term sense.
Unless you get a farmer in true credit distress, where they're just unable to pay their rents we are largely unaffected by a good year, but by a good year or a bad year I mean, it just we get cash rent now we have a small portion of the portfolio. That's cropped shares so the benefit or the pain shows up more quickly.
The so thats kind of a one year or one season view, if you take that an extended out a bit farther.
So farmers have crop insurance that generally the crop insurance will give them back on us to help pay for.
Their rents and their direct inputs for the crop probably no profits for the farmer, but better breakeven kind of number so theres a lot of stability in the system.
If you and then these these MSP payments that the U.S. da is now distributing due to the trade war.
It is also a source of additional.
Revenue for the farmer.
And so you know that there's quite a bit more stability than you might think just reading about.
About the flooding in the Midwest or something like that when you roll forward, though into a two or three year time period.
As we start to regain renegotiate leases if youre in a down cycle lease negotiations are harder than if they are if you're in an up cycle you may take some reductions in rents Buck.
I think I've talked about this in prior conference calls the baseline is not zero. The baseline is to assume you would get about a 3% to 4% per annum increase in rents.
We are not achieving that today, but we are generally achieving slightly positive numbers in rental rate increases.
But the trend line as it is not is not zero, it's not flat the trend line.
His us expectation about 3% to 4% increase.
And so we're falling behind kind of our expectation our long term internal model, but still eking out generally modest increases.
In rents.
Now you also asked about regional and crop type variation.
One of the places, where we have a higher percentage of participating or crop share rents than as a total dollar matter than anywhere else is in our specialty crop portfolio, the California assets in particular.
Lots of citrus lots of tree nuts.
The trade war is starting to have a relatively significant impact in the Trina.
Markets and that will be reflected into lesser participating rents.
For us unless it turns around.
I mentioned in the prepared remarks.
When when there is a trade war or pricing or demand decline.
Tree nuts wallet, great crop and we love the crop as a part of our portfolio.
You literally though could have.
Buyers just choose not to buy the good for some reason.
When you turn to the primary food crops like corn, soybeans and wheat generally speaking those crops will eventually get consumed.
Somewhere by somebody.
May not be China, but it'll be somewhere else in the world and it has to do with the fundamental importance of the crop in the global food chain and Citrus is obviously similar you may not sell out all your citrus.
In any given year it because it's not a crop that's easy to store so you've got.
Lots of regional variation.
Again. This is why we wanted and built a broad portfolio.
So you, whether you're whether through the down cycle in a reasonably.
Reasonably good way.
All right.
Appreciate the color there as well just shifting gears to the elevated legal cost in Twoq should we expect a few key number should should we expect that over the next few quarters.
I think the most recent quarter was probably slightly higher than.
Than you would expect in the next few quarters, but it's incredibly unpredictable.
You know there are we are battling.
Art, we're going after RF.
In terms of.
And in our view finally, getting some traction which is the source of my comments.
In the prepared remarks, we are.
Defending the class actions.
That were spawned out of the crime road unfortunate committed against the company.
I can't believe that there is a group of shareholders and lawyers, who want to just punish the victim, but there seems to be.
It's in my view, it's a glorified insurance fraud against our our insurer, but it seems to be the world We live in.
So it's just it's so many different moving pieces hard to predict.
We don't like those costs, but as a major shareholder and what were the kind of long term view.
Winning those cases and recovering cap cash and some reputation.
It is important that we think the long term value and the costs, while painful on a quarterly basis are not really all that significant.
In the Grand scheme of things the more significant thing is what it's doing to.
Company morale tenant morale.
Ability of the company to continue to grow.
So we will.
Hard for me to predict.
Exactly what happens in a quarter, but I feel like this quarter was probably up close to the top I hope.
Okay, and one last one for me and I'll turn it over but recognizing there's some again immediate impact given the variable interest expense just thinking in terms of the recent reduction we've had an interest rate just balance sheet opportunities on the debt side and in the current interest rate environment, especially just given where the weighted average.
Duration is on your desk right now.
We think have been.
Very very I could give you an hour long answer, but I'm going to give you a minute long answer we think that the rate reductions that have already come through and the rate reductions that we believe may come through in the next few months are likely to show up between a quarter million and a half a million dollars a year in interest cost reduction.
There is a lot of.
If you want to call Luca after the conference call call and then go through that all the moving pieces are in the public domain. So we can talk to you about it.
But if you kind of start looking at what amount do we have adjustable what of the three year debts are about to adjust.
You start to get a mathematical analysis that we do to the answer I just gave you.
Thank you I'll turn it over I appreciate the color.
Yes, Thank you count.
The next question comes from Dave Rodgers with Baird. Please go ahead.
Hi, Good morning, Paul.
Good morning can you.
Maybe talk a little bit about the farmers situation from the revenue and expense side. Obviously, you went through crop yields and maybe the impact on future price. This year, but can you also talk about the cost of fertilizer costs et cetera, and kind of how that would set them up to maybe get back on track with that 3% to 4% long term increase in rents and revenue that you've been looking for.
Yep, So, we'll all do that but but since you asked the question that way, let me give a little bit of context for everyone else on the call.
So historically farm approved.
Two sources of upside from farmland one is rents the other.
His appreciation both are generally tied to long term return to other low risk assets. The most common connection is the 10 year.
It is a pretty good.
Indeed directional indicator of rents and rental increases and of land appreciation at some level. If you stay in a long term so the 3% to 4% number I quote is based on a 30 40 50 year history of.
The land value appreciation and rent increases if we are permanently or semi permanently in a relatively low interest environment by historical standards.
3% to 4% May turn out to be two to three.
But in real terms it doesn't make any difference if you understand what I'm, saying because.
It's really us spread measurement at some level and whereas in a fundamentally lower interest rate environment. Our real returns will be about the same they may be they may be.
Nominally lower than history.
With that context on all of the other input suppliers and we look at ourselves at some level as an input supplier to production agriculture, we provide land.
They are trying to squeeze out.
Modest increases in crop inputs as well.
In you know whether its seed whether its chemical whether it's fertilizer and each of them have different market power.
Due to try to get that done.
And it's a you know that I mean, that's what the farmer is fundamentally up against.
The key thing to keep in mind, though.
Is that we farmers and the.
XOMA sort of commentators academic industry, so on and so forth have a tendency to talk.
In terms of.
Dollars per acre fertilizer or of chemicals or of seed or or frankly, even a brent.
That's actually the wrong financial analysis, the correct financial analysis is dollars or actually pennies.
Per bushel.
Whether its rent whether it's.
Seed, whether it's chemicals, whether it's fertilizer.
The actual amount per bushel in the last few years has declined substantially for most farmers you had really high yields you had really.
Slight increases in input costs of all types. So your pure unit of production economics based on a bushel have actually gone in the farmers favor and has one of the reasons there withstanding what looks like a big downturn better than I think a lot of people expect.
So going forward.
You're going to your your big Farmer today is operating in our opinion, just right at or right.
Above or slightly below just right in the neighborhood of breakeven and its different for every operation.
Their total entity profitability, though is very affected by how much land base in their operation they actually own themselves or their family owns if a farmer has farmland that they have fully paid off.
They do not rent from anybody, but they or their their family own it.
There is almost no corn soybean price or we price that causes them to lose cash on those acres I mean, they're just don't you know that and this is a.
No that's not the way any of US on this phone call I think about the world, but these are family owned businesses and they are saying.
My profitability on that on that crop on those owned acres is still pretty high because they're not fully factoring in the true economic long term carrying cost of the land.
But but thats.
That's just that's just the way a family business operates and Thats how this industry operates.
Hope that helps Dave.
Recur.
We talked about this we talk about this more Luca you can add to this but I'll give the general point if you want.
We talked about this more in the prior conference call.
If you recall I mentioned that there was a bunch of one time weather events Hurricanes et cetera.
That we're going to have an impact on property operating expenses and the exact math might caused a decline in revenue might cause.
Uninsured losses of some sort on a property. We did have some of those things I think there was actually more of it in the first showed up in the first quarter that showed up in the second quarter.
And so.
They are one time in the.
So to answer your question, though Dave there are one time in the sense that.
The onetime in the sense that.
You know it won't be exactly the same weather event next time.
But were portfolio theory works both ways.
We will incur or from time to time, those sorts of costs, they're going to be episodic an unpredictable, but I wouldn't.
I wouldn't create a model that assumes we never have anything bad happened you know to our physical asset.
Because we I don't I cant predict what it is where it is or how much it will be but it'll we try to ensure and cover as much of it as we can but we will face some of that in the future as well just it's probably a little bit elevated in the most recent quarters, but I wouldn't take the number to zero.
Gotcha, let Paul I guess on the stock buyback. It obviously makes a lot of sense from an economic standpoint, given the number you quoted for any of your book value.
But I guess I wanted to ask about kind of more aggressive debt reduction the numbers, maybe don't look quite as good but wouldnt position you better as you get to the back half of all of this and got through your litigation to be at an acquiring without having to immediately issue equity. So wanted to get your thoughts on shifting the buyback and maybe a much more aggressive debt reduction program.
Yes, I mean, we.
Every time you know this is all being done Opportunistically. So every time, we make an asset sale and then we frankly turn into the markets for.
For for additional buybacks because we're we're doing it from cash that we generate.
We have that discussion.
I had the principle you are promoting a we generally agree with whether it's the reduction in debt or the reduction in preferred.
But as long as that stock is docked down here.
In the you know fives and Sixs.
The argument kind of falls apart because the value creation opportunity purely from buying back stock is so compelling.
For remaining shareholders. So we.
We will.
I will kind of continue the course I would guess you will see.
A modest shifting toward more debt reduction and preferred buybacks.
But it's very tempered by exactly what that prices.
Is.
What our shares are trading at what I said in my prepared comments to give everyone a little deeper insight at least into what I think.
I think that our.
In a b per share is probably at a low of around 12.
And it may be as high as 15.
On the stocks trading at 650.
It's hard to pass up the opportunity to.
On an almost double or or in fact more than double your money by investing it in share repurchases, but but I mean, Luca and I both agree with the broad point.
That that we'd love to see debt and preferred come.
Be reduced as well because that would certainly drive shareholder value.
Appreciate all the color Paul Thanks.
Thanks.
The next question comes from Rick lewd or in.
Investor. Please go ahead.
Yes.
Thank you for taking the call here I think is once youve most questions ahead on.
Really concerned in one area here on the suit Rota Fortune a.
I'm wondering is a suit filed is it already on the docket where are we there.
And what kind of damages are we looking at here, we asking for.
Yes, so there's there's two different there's two different lawsuits broadly speaking.
One is us going after wrote a fortune a in the Coconspirators that that he writes the rights and come up with an idea they put on a bunch of short positions. They pay wrote a fortunate to write this article in seeking alpha publishes and they hope.
The hit a home run, which they did on us and dump their short position into the panic. It is classic stock fraud. It is nothing else. Okay. That's we're going after those guys. They are trying to maintain anonymous anonymity.
They seem to believe that first amendment protect stock fraud, we obviously don't agree.
Nobody agrees by the way, but they're playing a delay game as long as they can we will get through that eventually.
In our opinion, so that that's a set of cases, we're going after those guys who knows what the recovery can be we think they cost shareholders over $100 million on that day Theres a lot of kind of academic research around how to think about damages, but the damages to the company are substantial we lost business. We've lost people, we've lost reputation and all shareholders lost a lot of money.
And we're going to keep pursuing it because we believe we have a valid claim and that there are.
Some pretty deep pockets behind this this scheme.
Then.
Then to make matters worse for us as a company.
The plaintiffs bar and that's the ambulance chasers of the security industry.
Take that baked news written by road. Unfortunately, and then they sue us over it as a company.
On the basis that the loans were bad Mr. Half was a related party that the companies going insolvent. We are gradually proving that none of that was true. It always said it wasn't true.
But you know there is a group as a small group of shareholders out there trying to screw the rest of us.
And maybe they will come to their senses and have some ethics and back off but we're not counting on it.
It's a racket.
And its a.
Frankly in my opinion, its a fraud on Dino insurance racket.
That they're participating in.
But thats, where we are.
Will we believe will win the facts are the facts, but you know, it's painful and expensive.
Okay.
But we didnt.
Put a value on that anything when we filed the suit is that correct. So when we filed the suit I don't know whether your debt.
All of these documents are in the public domain.
I don't remember what I think we have it.
A some sort of claim for damages and that's huge but it's you know.
We're we're a ways away from getting to the expert testimony testimony related to exact damages, but it's certainly worth.
Rick it's worth our.
Pursuit of this as shareholders.
And as you probably know him.
Probably the single largest common shareholder in the company certainly the single largest individual common shareholder.
I think it's worth the financial recovery or we wouldn't be doing it.
Oh, yes, I agree with that sure.
Is there any time limit here, another which is on the docket already with the case is going to be heard of or not.
Yet another case eliminate bizarre in the cases are in both in federal courts I'm working their way through.
They are in there.
Believe they're both in Colorado actually our general counsel and outside counsel handles a day to day on this but yes. They are there, but it's I don't know how much litigation you've been involved with I had never been involved there is an awful lot of motion practice.
In advance of actually you know.
The.
The true clinical trials, yes. We are we are engaged in that long term motion practice at this point.
Okay. Thanks for the information he joined the call. Thank you.
Thank you.
The next question comes from Tom Forbes Investor. Please go ahead.
Yes, my question ballpark figures.
What what percentage of your land portfolio is rented versus custom farm versus share cramping.
And very broad numbers about 80% of our total revenue.
I'm going to answer this slightly differently than the way you ask it because it's the statistics I know.
And Luca if I say this wrong feel free to correct me, but I think we're about 80%.
Our revenue comes from some sort of fixed rent.
And what I mean by that is not that that some of those rents may have a combination of fixed and crop share. So about 80% of total revenues or our company has historically been fixed rent then we have.
Crop share we have very few 100% crop share where you know the only source of revenue. We have is a split of the profitability from a grain sale.
But we have a few of those they tend to be concentrated in dry land farms in the western high Plains, that's a more traditional methodology in that area, but that would be just a couple percent if even that.
Not very much Paul crop share.
Then on the.
Most of our crop share as a place in which we might get a three or 4% return.
Against the purchase price of the farm as a cash rent and then on top of that some potential bonus if performance.
Of that crop is good that year, then direct operations direct operations for us is.
Really kind of.
It's it's largely maybe even entirely but it's largely limited to development properties.
Where we.
Where we are in the process of.
Pushing out a block of trees and replanting trees. So there really is no profitability for a tenant to pay us rent from so those farms, we end up putting into our Trs in direct operating.
Luke I don't know Optima head what percentage of the total portfolio that is today, but it's not very much.
No I think it's sort of the Dominion is it's about 1800 acres fundamentally correctly.
The 1800 acres, it'll be mostly specialty crops tree nuts, citrus and the like where we are doing that.
I guess, we are doing some direct operational blueberries right now where we are trying to improve.
The quality of the bushes substantially on some farms.
But it tends to our true direct operations tend to be pretty de Minimis, it's not it's a necessary part of our business, but it's not the primary business model.
Thank you.
Thank you.
The next question comes from Craig Pacira with B. Riley FBR. Please go ahead.
Hey, Good morning, guys, just one more for me.
Just Paul given your commentary on sort of the tree not environments.
Related to the tariff is there any way you can put some sort of a band around what the impact to participation income might be in the back half of the year, particularly as you recently toured all these these farms over the last 60 days.
The answer is I cant right now if I, if I could have I would have.
It's up.
In our opinion it will be.
You know, we will it will be negative, but it won't be a disaster I mean, there people are growing almonds and selling almonds and you know the challenges are selling home runs at a quite a bit lower price than they used to sell them at and there's so much slower.
But.
You know, Jeff we just just don't have an exact measurement you know those farms that I'm referring to.
Tend to be.
And those tend to be the ones, where we would get some portion of fixed rent.
Based on you know some return on the original purchase price of those farms is all that usually thought of and then a bonus on top of it.
Some of those farms are up for renegotiation in terms of their leases right now, it's obviously been a.
Tough.
To say you know starting to be the second cycle through the tree not guys have.
Decreased exports.
So.
You know I.
I think that will be a harder rent negotiation than it otherwise would have been.
But it's you know it's again, it's back to the portfolio theory, Craig I, just do it'll it'll be painful it just won't be hugely so because it's balanced out by the rest of the portfolio.
And if we if we get a quantification of that we'll put it out in the future.
The next conference call.
Perfect. Thank you.
Again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to Paul Pittman for any closing remarks. Please go ahead.
Oh. Thank you all for your time. This morning, you know that just to recap our continued strategy will be to opportunistically sell assets buyback stock and reduce debt.
As long as our shares are trading at such a substantial discount.
And we will continue to pursue this the folks that have hurt all the shareholders wrote a fortune a and its coconspirators.
And try to bring these stock manipulators, two accounts and recover financially.
We are cautiously optimistic that the civil court process as well as law enforcement will help us in this process.
But.
That's a that has to work its way through.
The court system.
With that thank you for your continued support of the company and look forward talking to you again next time.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.