Farmland Partners Inc (FPI) 2014 Q3 法說會逐字稿

Good morning and welcome to the Farmland Partners third-quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Paul Pittman, President and CEO. Please go ahead.

Thank you. Welcome to Farmland Partners' third-quarter 2014 earnings call and webcast. We truly appreciate your taking the time to join us for these calls, because we see them as a very important opportunity to share with you our thinking and our strategy in a format less formal and more interactive than the public filings and press releases.

With me this morning is Luca Fabbri, the Company's Chief Financial Officer. I will now turn the call over to Luca for some customary preliminary remarks. Luca?

Thank you, Paul. First and foremost, I would like to also welcome you to this conference call and webcast and thank you for joining us. The press release announcing our third-quarter earnings was distributed yesterday evening.

A replay of this call will be available shortly after the conclusion of the call through November 13, 2014. The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, October 29, 2014, 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, our identified acquisitions and farm properties under evaluation, impact of acquisitions, and financing activities as well as comments on our outlook. We also will discuss certain non-GAAP financial measures, including, but not limited to, FFO, AFFO, EBITDA, and adjusted EBITDA.

Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the Company's press release announcing third-quarter earnings, which is available on our website, www.farmlandpartners.com. 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 advised listeners to review the risk factors discussed in our press release yesterday after market closed and in documents we have filed with or furnished to the SEC.

I would now like to turn the call back over to our Executive Chairman, President, and Chief Executive Officer, Paul Pittman. Paul?

Thank you, Luca. I want to spend a few minutes discussing the fundamentals of our industry, our strategy, and our execution. The key factor behind investments in farmland, of specially farmland that produces key commodity crops like corn, soybeans, wheat, and rice -- although please remember that we invest in farmland and do not actually farm -- is the chronic and worsening imbalance between global grain demand and availability of farmland to produce those grains.

On the demand side, we see population growth and GDP per capita growth. While the link between population and demand for food commodities is obvious, GDP per capita growth in emerging economies like China and Southeast Asia is even more important.

In those countries, rising income strongly correlates to demand for more and better quality food, like animal proteins such as meat and dairy, which has a multiplier effect on grain demand since it is the food source for these animals. These demographic forces have generally proven to be very resilient and even an overall slowdown in world economic growth would not have much of a dampening effect.

On the land availability side, we are facing nearly a full utilization of available farmland worldwide. The amount of additional land in the world that can come into production remains limited and is unlikely to increase meaningfully. Future increases in grain production must come from higher productivity per acre, not more acres.

This, over time, should increase rents and land values. This does not mean that food commodities will increase in price every single year. When looking at commodity prices, as an indicator of farmer profitability, it is important to determine if the low price is a function of a large supply or a weak demand.

Commodity prices in any given year are heavily dependent on that year's yields. This means that we will have years like 2014, characterized by record high production worldwide and soft prices. But it also means that in any given year, we are just one bad weather event in any major growing region from not having enough food to feed the world's population.

Farmland and lease rates will be based on the three- to five-year outlook for farm profitability, not near-term commodity prices. In our opinion, our stock price today has traded in line with the decline in corn, soybeans, and other commodity prices.

This is a mistake and a misunderstanding of the core principles of our business. We largely collect cash rents and are therefore not at near-term risk to any substantial loss of revenue due to low commodity prices for a year or two. We expect rents on our portfolio to be up modestly for 2015 on a same-store basis.

In the two quarters since the IPO, we at Farmland Partners have executed on a strategy that we believe will lead to strong returns for stockholders over time. We are seeking to build a nationwide portfolio that will take advantage of the global growth in grain demand while minimizing risk through, among other things, geographic and crop diversification.

The lion's share of this global demand is for primary crops, such as corn, soybeans, wheat, and rice. And that is the type of farmland we have in our portfolio today. At the completion of our IPO, we had 7,300 acres, of which about 6,300 acres were in Illinois and Nebraska. These farms can be characterized as classic Corn Belt farms.

Now counting those farms already owned and those under contract, although there is no assurance that the ones under contract will close, we have today over 38,000 acres nationwide. We have continued to modestly increase our presence in the Corn Belt, which now totals just under 10,000 acres.

We have acquired about 18,000 High Plains acres, which primarily grow wheat and other dryland crops. And we have built a significant footprint in the Mississippi Delta states of Arkansas, Louisiana, and Mississippi, about 10,000 acres that grow rice, cotton, as well as wheat, corn, and soybeans.

We have said in our prior investor communications that we would expand our portfolio initially into the Delta and the High Plains and we have done so successfully. In the coming quarters, as we add greater diversity, we will continue to add land in the three regions I just mentioned as well as seek to expand in the Southeastern United States, the Pacific Northwest, and begin to diversify into annual specialty crops, like vegetables.

This morning, we also announced the stock buyback program. Our stock price has recently been very depressed and we believe it does not reflect the true value of our assets.

Despite popular press reports to the contrary, we believe farmland values continue to be strong in most regions of the United States. Even where there have been modest reductions in land values, they have been nowhere near the decline in our stock price.

Thus we believe that buying back shares at these prices will enhance value for our stockholders. In addition, Company management and directors have made meaningful open market purchases since the IPO, which reflects our confidence in the long-term value of our assets.

With that, I will ask Luca to walk through some of the key operating and financial highlights contained in our earnings release. Then we will take questions you may have about this discussion during Q&A. Luca?

Thank you, Paul. The third quarter of 2014 was very eventful for our Company. If I had to use one word to characterize it, it will be growth. First and foremost, as Paul already pointed out, we grew our portfolio. We closed two acquisitions, one of which in Arkansas marked our first foray outside our historical geographic footprint of Illinois, Nebraska, and Colorado.

More importantly, we executed contracts for $32 million of farms and $24 million more so far in the fourth quarter. With the expansion of the portfolio, we keep diversifying our tenant base, as essentially every farm is rented to a different third-party tenant.

The second dimension of growth in the third quarter was equity capital. We completed a follow-on on the recent public offering of our common stock, which closed on July 30, and generated gross proceeds of approximately $46.5 million. The net proceeds from these offering are being used primarily for farmland acquisitions.

Thirdly, we paved the road for further growth of our portfolio by securing an efficient and cost-effective source of debt capital. We now have a $75 million secured note purchase facility with the Federal Agriculture Mortgage Corporation, more commonly known as Farmer Mac, a leading credit provider in the US agricultural space. Under the Farmer Mac facility, we have issued $26.2 million of three-year interest-only bonds at fixed rates with a weighted average of 2.39%.

Finally, we grew our team. In the third quarter, we hired Wade Harrison, an outstanding farm manager with a strong background in farm acquisitions and farm portfolio management. Wade is based in Memphis, Tennessee, and has already significantly enhanced our farming acquisition capabilities.

And today, I am particularly pleased to announce that we hired Ben [Palin], an experienced farm manager and a successful farmland investor in his own account, who will be based in Denver.

Now let me turn to our third-quarter financial results. Here, I would like to highlight some key facts and I invite you to refer to our earnings press release for more details. In the second quarter, we recorded revenues of $1.3 million and net income of $34,805.

Like many other REITs, we look at certain non-GAAP measures, particularly adjusted funds from operations, or AFFO, as additional measures of our performance. We calculate FFO, funds from operations, consistently with the definition provided by the National Association of Real Estate Investment Trusts.

The key adjustments we make to FFO to arrive at AFFO are to recognize revenue in the calendar year in which the cash rental payment was actually received and to exclude non-cash expenses, such as stock compensation. Our AFFO for the second quarter was $477,738 and $918,830 for the first nine months of 2014.

On a fully diluted basis, AFFO per share was $0.06 for the third quarter and $0.20 for the first nine months of 2014. When we calculate per share non-GAAP measures on a fully diluted basis, we include units in our operating partnerships, which is our main operating subsidiary, because of the one-to-one convertibility into publicly traded shares.

On that basis, our fully diluted share count as of the end of the second quarter -- pardon me, as of the end of the third quarter was $9,676,855.

This concludes my remarks on our operating performance for the third quarter. Thank you for your time this morning and your interest in Farmland Partners. Operator, we would like to begin the Q&A session.

(Operator Instructions) Dan Altscher, FBR Capital Markets.

I was wondering if you could give us a sense of maybe what the cap rates look like on some of the newer purchases that came in in October and are still hopefully scheduled to close in the fourth quarter? And then how that relatively compares to maybe some of the -- I guess you would call the legacy portfolio of Nebraska and Illinois.

Sure. We can -- so our target cap rate for acquisitions is to try to achieve a 4.75% cap rate. And just to make sure everyone is clear, what we mean by that is if you took the rent received divided by the land price, we would be getting a 4.75% current return, not counting appreciation.

So that is our target. We are basically doing transactions anywhere between a low of about 4.5% and a high in the low 5%s. Obviously, every transaction is different. We are doing transactions that we are confident are adding value to the overall portfolio.

To give you a little more flavor, a transaction in the low risk operating environments of the Corn Belt, so the few additional acquisitions we have done in Nebraska, they will be at slightly lower cap rates, maybe even slightly lower than 4.5%, but not materially so. And that just reflects the strength of those regions as a farming region.

To your question of the original portfolio, the original portfolio would have been valued more in the mid-threes, which is very common for Illinois and Iowa. Those two states are, as I always say, the Park Avenue of farmland real estate, characterized by the highest valuations, the lowest risk, but also the lowest cap rates.

On today's stock price, though that original portfolio is implicitly valued at cap rates much, much higher than that, are going in price.

Okay. Yes, no, that is helpful and that is kind of what I suspected. For rent rolls into 2015, have you started to have discussions with the operators in terms of what rent rolls can look like in terms of increasing or decreasing rents, particularly related to your comments about lower corn prices out there and maybe there is a disconnect between farm value than the broader economy or we are seeing in commodity prices?

How is that increasing impacting the farmer down at the operational level and the rents you expect to receive into next year?

Yes. That is a very good question. So let me break this apart. There are two types of leases in our portfolio. There are the leases that are coming up for renegotiation at the end of the 14-year and there are the leases that are continuing on because they are multi-year leases beyond the end of the 14-year.

We are not seeing any requests to renegotiate rents on those leases that continue on beyond the 14-year. Not a single tenant has come to us and said, oh, my God, corn price is down, I want to reduce my rent.

That is not the way the farm industry works. People do not renegotiate midstream. A deal is a deal and they stick with it.

On the rents that are rolling over, we will have a modest increase in those rents on the overall portfolio when those leases are put back in place for 2015 year. Almost all of those rents on an individual farm basis are going up. Although we all are having a little bit of push back in some of those renegotiations, but the entire pool will still modestly increase.

Great. Thanks for the comments, Paul.

Dave Rodgers, Robert W. Baird.

I wanted to ask a first question -- and Paul, I think in your prepared comments you said that maybe you are seeing a modest decline in crop land values. If you did say that, I would love you to kind of put a little more color on that.

And I think the second part of what you had said was that crop price declines are not the true indicator of kind of what is happening. So could you give us a little bit better color on where farmer revenues -- kind of total, all-in revenues are looking this year relative to last year and how that is influencing those prices?

Yes. Sure, Dave. So if I leave out part of your question because it was a multipart question, prompt me again. But so talking first about farmland value, and this is -- the popular press, everybody wants to be a Cassandra and talk about how the sky is falling.

That is, frankly, not supported in the data. If you look at the fed data, you look at USDA data, farmland values have continued to actually increase from 2013 to 2014. We talked about this in the second quarter conference call. You have not seen any sort of nationwide decline.

However, there are a couple regions where we have seen softening. We have seen softening in the Delta. That is one of the reasons we have done as many acquisitions there recently as we have. We think there is good value opportunities.

In general, to the extent you are seeing any softening at all, what is missing from the market that was there two years ago were these headline grabbing prices, like a $20,000 price per acre in Iowa or northern Illinois. Those don't occur anymore.

But that was never really the market. Those were the -- as I say, every transaction of that scale has a story. You have got two neighbors fighting over the land. You have got a 1031 buyer or something like that.

The core of the market is really sort of hanging in there, if not modestly increasing in most regions. And as I said, the Delta is kind of one place we have seen it pull back a little bit.

Turning to your second question about the farmers' kind of P&L. Farmer P&L for 2014 is quite strong. It is strong for two reasons -- low corn price, low bean price, but very, very high yields. So you are not getting a one-for-one reduction based on price.

Total revenue per acre is still very high. That is even amplified by the fact that many farmers have sold and presold 50% or maybe more of their crop. So their P&L for 2014 is very strong.

Looking forward to 2015, if there is a crunch, kind of a profitability crunch for our tenant base, it is 2015 when it will come, not 2014. If prices would remain this low, farmers will not have had the opportunity to pre-sell.

But I think it is important to recognize that -- go look at the Chicago Board of Trade for December 2015 corn or for December -- I mean, November 15 beans, and you are looking at $11 soybeans as the projected price and you are looking at something like $4.18 or $4.20 on corn.

So it is reasonably unlikely that we are going to stay down here that long. Even if we did, though, farmers have such a strong balance sheet coming off of the five or so very good years in the recent past that I don't think you end up with -- you may have P&L pressure, but not balance sheet pressure that leads to farmland sales and price declines, even at the end of the 2015 year.

There was a third piece to your question and I have forgotten it. So if you --

I think you got most of it. It was just tying the two together between the land prices and the farmer revenues. And I think you kind of provided some color on that. So that is helpful.

Maybe a second question -- the acquisitions that you have announced or not necessarily closed, but have under contract for the fourth quarter, are running just under $7,000 an acre. Just give a little more color on kind of what that land looks like relative to what you have been buying -- I guess irrigation-wide storage facilities, the quality of the land, et cetera.

Yes. So I mean, nationwide, averages are, frankly, a little bit meaningless. So let me break it down regionally a little bit for you. So we bought some very, very -- of the original portfolio, that was -- that I said was Corn Belt-based, roughly 6,300 acres. The bulk of those acres were Illinois and actually a relatively modest amount in Nebraska.

So we have made a few acquisitions in Nebraska. Those will tend to be in the $8,000 to $10,000 per irrigated acre range and really high quality eastern Nebraska farms. If you are in the dryland High Plains area, when we are doing acquisitions there, you are thinking somewhere between a low of about $1,000 an acre and a high of about $2,500 an acre for dry land in that region. And it is very dependent on soil quality and local weather patterns and the rest.

The Delta is largely a kind of $4,000 to low $5,000 an acre area. And, again, each farm is different and it depends on the water availability and the soils and the local markets and everything else. But that gives you a sense of those values.

So it is a mix issue. Okay. That's helpful. And then, I guess, last question for Luca. On the stock buyback -- and Paul, certainly offer here as well. It sounds like your metric is really kind of the going in price per acre of the stock versus kind of the embedded value that you put on the price per acre in the portfolio.

But how realistic is it that we expect this $10 million buyback to be executed on a real-time basis and how much can you buy back? When would you expect to get through this program, if it is going to be an active and meaningful program?

Well, we are truly trying to raise -- we are trying to increase the scale of our Company. There are very positive returns to everyone in terms of increasing the scale and reducing the overall SG&A cost as a percentage of the assets we have under management.

That being said, our stock price went as low as, I think, $9.52 was the low close. At some point, that is what I would call an IQ test. We are going to buy stock back at those depressed levels because it is such a value addition to all of the major shareholders, myself included, of this Company.

So I think you should anticipate that what we do with the buyback is that we will try to put some level of floor underneath this stock and make sure we do not trade to what I view as, frankly, ridiculously low levels, because it is not fair to the shareholders who are hanging in with us to have that happen.

That being said, we are -- I mean, we are truly trying not to give capital back. We are trying to grow the Company. But we are not going to let -- watch our stock trade at such incredible values without entering the market and trying to do something about it.

Great. Thanks for all the details, guys.

Eric Gottlieb, Stephens.

Touching on the last question, I am wondering if, given the repurchase program, does this change the Company's dividend policy at all? Or that -- you said that it will be used primarily to establish a floor. Does it change at all that cash is used primarily for acquisitions?

No. We will still use the bulk of our cash for acquisitions. And it is not going to change dividend policy.

Got it. And as far as the acquisition strategy going forward, if you had to rank of importance, are you looking more for diversification value properties, where rates in land values can improve over time, high quality assets with good cap rates now, but are more expensive? What would you call more important?

Well, I think you have to -- I mean, all three of those factors are important. Each of them have independent value to the portfolio we are building. Broader nationwide diversification is a value in and of itself because it lowers risk. So you might squeeze cap rate slightly to add diversity, because on a portfolio wide basis, that is an accretion to risk-adjusted return.

However, high cap rate is always attractive to us and as we see pockets of value, which is what will happen when you are having a bumpy operator environment, which is what low corn and soybean and wheat prices cause, you are going to get opportunities where somebody needs to sell or somebody really wants to restructure their balance sheet and we can achieve modestly higher-than-normal cap rate, we are going to chase those transactions very hard.

And where are you seeing more opportunities right now? As far as -- go ahead.

Well, the opportunities -- I mean, there are -- the core of the Corn Belt, there are very few opportunities. I mean, if you work very hard, you can find a few transactions. But in general, that market continues to be very, very strong.

There were -- was a sale in that market just last week by a national level auction house. It was a substantial number of acres. And those farms sold at very high prices by historical standards.

We do believe there is some opportunity in the Delta, as I said. We think there is substantial value opportunity in the Southeastern United States, but as a small company, we try to be a little bit focused and so you should anticipate us focusing there next.

We also -- today, we probably have about as much as we would like right now in the High Plains, although if a really good opportunity came along, we would pursue it. And we will also believe there is starting to be the value opportunity in the Pacific Northwest.

Okay. And then my last question is can you detail the responsibilities that been Ben Palin will have? And then I will pass it on.

Ben will be looking for acquisitions for us in a kind of large swath of the middle part of the country and will also manage farms that we already own in that area.

Okay, great. Thank you.

(Operator Instructions) Paul Adornado, BMO Capital Markets.

I was wondering if you could provide a little bit of the back story on some of the acquisitions. Part of the thesis was that FPI would kind of appeal to families looking to diversify.

And I guess related to that, are you still offering OP units, given where the stock is trading, or maybe offering OP units at a premium or some combination thereof?

Yes. So in terms of the transactions that we are doing, many of these transactions are coming to us from family -- what I will call intergenerational family transition. That is probably the largest source of our transactions.

Some of them come to us directly and some of them, obviously, hire real estate brokers before they find us. But that is probably the motivating event leading up to most of these transactions.

On the use of OP units, we still have not used OP units in a transaction. We, frankly, were close on a transaction recently, but with a major drop in the stock price days before finalizing that transaction, that opportunity went away for us. And so the volatility in our stock and therefore the volatility in the value of the OP units has made that difficult for us.

But, if you recall, Paul, as I have always said, I frankly view the use of OP units to be something that would take in the neighborhood of one to two years. We only went public in April.

Farmers, as a group, have very good gut instincts and are good business people. They are going to be very cautious about taking our security as currency in an acquisition until they watch the stock stabilize and have a little more liquidity and volume than it currently has anyway.

Great. Thanks for the color there. And then perhaps related to that, you mentioned that some of the deals were sourced from brokers. How is the deal flow coming to you? I know you have got a lot of relationships and through first or second degree relationships, you probably know a fair amount of owners. Was wondering if you could just comment on the source of the deal flow?

Yes. I haven't kind of worked that statistic specifically of how many are -- have an intermediary of some sort -- broker, auctioneer, or others involved and how many are direct with some member of the family group that owns it. I would say that it is in the neighborhood of 60% broker or other intermediary and 40% direct contact.

And that would be sort of consistent with my historical experience in the last 15 years. We believe that high quality farmland brokers add substantial value in the process. We, of course, like sourcing transactions directly when we can.

But we are not going to cut ourselves off from the broker-initiated opportunities because that is a huge piece of the market and those brokers provide a value to us.

Okay, great. Thank you.

And this concludes our question-and-answer --