Farmland Partners Inc (FPI) 2015 Q3 法說會逐字稿

Good day and welcome to the Farmland Partners, Inc. third-quarter earnings conference call and webcast. (Operator Instructions) Please note that this event is being recorded.

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

Thank you. Good morning and welcome to Farmland Partners' third-quarter 2015 earnings conference call and webcast. We have a lot of exciting news to discuss today; not only an outstanding quarter of performance, but also the new acquisition in East Central Illinois. We truly appreciate you taking the time to join us for these calls, because we see them as very important opportunity to share with you our thinking and our strategy in a format less formal and more interactive than public filings and press releases.

In my prepared comments today I will refer to a few pages in our standard investor presentation, which can be found on the FarmlandPartners.com website under the investor relations tab and it's called investor presentation. I'm now going to turn it over to Luca, but you may want to get that presentation in front of you while he's talking. Thank you.

Thanks, Paul. This is Luca Fabbri. I am the Company's Chief Financial Officer. First and foremost, I would like to also welcome 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 25, 2015. 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, November 10, 2015, 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 for our business, rents, and the broader agricultural market.

We also will discuss certain non-GAAP financial measures including, but not limited to, FFO, adjusted FFO, EBITDA, and adjusted EBITDA. Definitions of these non-GAAP measures, as well as reconciliations to the most comfortable 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 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 the SEC.

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

Thank you, Luca. What I'm going to do is spend a few minutes discussing about five separate items regarding our company. The first is to highlight some of the key accomplishments since our IPO. The second is our strategy and why we believe it is correct from a portfolio theory standpoint.

Number three is a land value and rent update. Number four is a quick overview and review of the recent wind and solar projects we announced. And finally, item five is to discuss the major East Central Illinois transaction that we just announced yesterday.

So starting with accomplishments since the IPO, and I want to refer you to two pages in our standard investor presentation, pages 8 and 9, which look at the growth of our companies in terms of both acres and value and the growth of the Company on a per-share basis. So I think a lot of times it's easy to get lost in a stock price that is, frankly, somewhat disappointing to us as management, but to look at the big picture for a second of what we've accomplished since April 2014 when we went public.

The value of our farmland at the time of the IPO was approximately $70 million. Now it is $345 million and that is before giving effect to the transaction we announced yesterday. That will take our total portfolio value to around $545 million.

We have capital available and dry powder, if you will, to continue to expand this portfolio without any additional capital raising to something in the neighborhood of $650 million or $700 million. This is a very powerful testament to our ability to create scale and our ability to find and execute on good transactions.

From an acreage perspective, at the IPO we had 7,300 acres. Today we have about 74,000 and again, giving effect to yesterday's announcement, we are now at almost 100,000 acres. That is a very significant total landowner position in some of the very best farmland in the world.

On a revenues perspective, at the time of the IPO on an annualized basis we have about $2.6 million of annual revenue. Now we will have this year an estimated approximately $16 million of revenue. And again giving effect to yesterday's transaction, we will be into the mid-$20 million of revenue, so we are rapidly growing the revenue line.

AFFO per share, this is a nine-month comparison 2014 versus 2015. In the nine months -- first nine months of 2014 we had $0.21 of AFFO per share. Now we are at $0.32 of AFFO per share.

General and administrative costs per share, at the time of the IPO they were $0.33 and now they are down to $0.25. So on every sort of business operating metric that we, as a management team, can control, we believe we are performing very effectively even though the stock price doesn't fully reflect that.

Moving on to item number two, kind of our strategy and why we believe -- actually before I do that I want to just point out one item on page 9. We also look at our debt per share, and what you would see is the gap between our debt per share, or OP unit, and our acreage and value per share is getting wider all the time. Meaning this is not a value fully created through leverage. So I just wanted to point that out.

If you are trying to follow along in the presentation, the next page I will discuss is page 14 and this is really a review of our strategy and why we think it is the correct strategy from a portfolio development or portfolio theory basis. The fundamental theme that we as a company are trying to attack is the idea that we are in -- we have global food demand increases in the face of fundamental land, farmland scarcity. And that is the key theme that has been going on for decades and we, frankly, think it will continue to go on.

So if that's your goal, the question becomes how do you build a portfolio that gives you the best opportunity to participate in that megatrend? Our perspective is that we should build a portfolio that will approximate, on a value basis, overall US agriculture production. What that means is you will end up developing a REIT portfolio that is largely focused on primary row crops and only modestly focused on specialty crops.

So a couple of statistics that sort of inform our thinking about this -- and these facts are on page 14. If you looked at the total market value of US ag production, you would discover that only 11% of it is specialty crops, 7% permanent crops like oranges and apples and grapes, and 4% vegetables. The remainder, the other 89%, is fundamentally made up of primary crops and livestock. There is a small amount, about 4%, which is sod and greenhouse, flowers and the like.

But the overwhelming bulk, like 85%, is primary crops or livestock. And livestock, you must remember, is fundamentally just the primary row crops in a different form, because the inputs to cattle, to dairy, to chicken, and to pork are these primary row crops. So if you want to have a diverse participation in this global food demand story, you need to be invested in a portfolio that is focused on what that story is really about, and that is the primary grains and the proteins. In our model, we use the grains as a proxy for the proteins.

If you look at it on an acreage basis and thought about it that way for a minute, the vegetables, fruits, and nuts are only 4% of the US farmland acres. So the idea that you should somehow equally balance in the portfolio the specialty crops versus the primary crops is just nonsense from a portfolio theory. You fundamentally should try to build a portfolio that reflects something that approximates the valuation of the different crops in the United States, and that's what we're doing.

The second thing -- the reason, though, that we will do some specialty crops -- and with the transaction we have just announced we are probably underweighted to specialty today. The reason that we will do some specialty is that the specialty crops do fundamentally trade on a different cycle than the commodity crops. They have different timing with regards to their highs and lows than corn, soybeans, and wheat.

We believe that by blending in some specialty crops into our portfolio -- and you should expect us to do more of this in the near future -- that what will happen is you will increase the overall cap rate and you will get some diversification benefit. The one thing to keep in mind, though, is that the specialty crops do have some additional risks that the primary crops do not have, the most significant of which is that on the permanent crops you are fundamentally locked into a certain crop type for a relatively long period of time. So if consumer demand changes, it's difficult to move away from that crop in a quick way like it is in an annual crop.

The second problem, though, is that you're also susceptible to certain disease risks, which can take away a substantial portion of your principal value, if in fact those disease risks affect that given acreage or that given orchard. So even given that, we will gradually put more money into specialty crops but I want to keep it in perspective that again we will be in the neighborhood of 20% to 25% specialty crops and 70% or 75% row crops.

The other piece of our diversification is we think it's very, very important to do geographic and tenant diversification. At the end of the day, the crops are all grown outdoors. You are very weather-dependent in the overall performance of the ag economy and so we want to spread out around the country.

We can see that we are doing that pretty effectively. We are in, I think, 11 or 12 states at this point and expanding all the time.

The other thing that we look at as we develop the portfolio is irrigation water risk is a substantial challenge in many parts of the United States' agriculture. We today do not own, for example, anything in California.

California is a very important growing region for some of the specialty crops, but we are, frankly, thankful that at this point we do not have any ownership in California. Because every single farm in California, no matter what anybody tells you, has got either political risk on the water or actual existence of the water risk and a scarcity risk. We all read the papers as it relates to water, risk, and California.

Then the final thing that we really focus on in our portfolio is to manage what we call the higher and better use opportunities for our farms. That can be anything from real estate development to mineral development to solar or wind power developments.

With that, I will move to the wind -- to the fourth item. I'll actually skip over the third for a minute and just discuss quickly the solar projects. We've done two green energy projects on our farms to date. We have had a wind lease, which we signed in October.

The key thing about these transactions is what they do is they significantly enhance the rental rate on a certain percentage of acres on a farm. Some of you may have questions about this later, but the key facts on this were that we had a farm that is approximately 1,800 acres. We were renting around 28 acres of that 1,800 to a wind power company and what we were able to accomplish was on those 28 acres, which used to make around $7,700 an acre total for us, we were able to move the rent to around $72,000 an acre.

So a 9, 9.5 times increase in the rental revenue on those acres. What that does farm-wide for us is it will move the cap rate on a farm like that, which was making us around 5.2%, 5.25% as a farm, up to something in the neighborhood of 6%, which is a very significant rent bump. So, when appropriate, we are very attracted to these opportunities to do green energy projects on our farms.

Another one that we have done is a solar farm. We've done a solar farm again October. In this case, we will end up using around -- somewhere between 60 and almost 200 acres could end up in this solar project, depending on how it's developed.

Again, you're moving the rent of this land from something in the neighborhood of $200 an acre to $1,000 an acre if it becomes part of the solar farm. That moves the cap rate on that farm from something like a 5% cap up to a 7% cap, if we in fact do all 200 acres.

So these are very, very powerful value creators for us. We own enough land around the country that I think we should expect to see more of this. When we acquire these farms, though, we do not overpay for these farms. We try to buy the farms based purely on ag value and then take these upside opportunities if we can and if they present themselves.

Moving on to land value update, and I will refer to a couple of pages again in the presentation here, that is -- I will be referring to pages 19, 21, 22, and 23.

There's been a lot of newspaper articles about difficulty in the farm economy, difficulty in land values. We are not seeing significant declines in land values anywhere in the country. The most -- the broadest data collection effort on this question is done by the USDA and that is information on page 21, if you're following along.

The USDA surveys land values across the country once a year. They do it in June and they publish the results in August. What you would discover is that that overall nationwide survey said that farmland values went up 2.4% from 2014 to 2015.

If you look at the states we own farmland in, you would see a range. In Arkansas it was up 7%, which is the strongest state, to a decline of about 0.3% -- I'm sorry a 1% decline in Kansas, where we own a small amount of property, was the weakest performer in the states that we own in.

If you looked at the summary of headlines you would never think that farmland values continually go up gradually between 2014 and 2015. So what we are actually seeing in the market is a story that is similar to what the USDA data says.

We have seen some sales recently set new records in the corn belt. It's, frankly, a little surprising to us as well, given what's going on with commodity prices, but it really reflects the strength of the balance sheet and the long-term financial performance of the ag producers that these land values continue to go up in the corn and soybean growing regions of the country.

We have also those seen occasionally a sale that was a no sail or a sale that sold for less than you might have expected it to a few years ago. And so really what is setting up here is a situation in which I think the general market trend is still flat to slightly up or maybe slightly down. But if you track a lot of transactions, which we do, there is an occasional sale now that becomes a bargain or a buying opportunity and we, of course, try to pounce on those when the opportunity presents itself.

It is important though not to get too focused on the annual farmland value question and to stay focused on the long-term trends. And this is the best presentation that we have of this to look at page 19 of our standard presentation, which fundamentally looks at the value creation that comes from farmland.

So between 2003 and 2014, farmland had a total annual return, meaning appreciation and current yield, of approximately 16.4%. That is higher than all other real estate property types, higher than timber, higher than the S&P 500, higher than gold. This asset is incredibly stable and incredibly positive returns over long periods of time.

The fundamental reason for that is twofold: because of the current yield component of something like 4% or 5% on average you very seldom have a negative year. In fact, in that timeframe there were no negative return years for farmland, while there were negative return years for almost every other asset class.

The second thing, though, that is important is at the end of the day this is all about that global food demand story. And it is very, very unlikely that global food demand declines.

It doesn't happen very often. It takes, literally, things like world wars or worldwide pandemics to cause global food demand to go down, so the asset class reflects that long-term global food demand increase. And our key thesis is now, in the face of land scarcity, a higher and higher percentage of those returns are going to accrue to the landowner.

The only other thing I want to mention here, because people often asked me about it, is why isn't this the 1980s all over again? I won't take you through this line by line, but if you would look at pages 22 and 23 of our standard presentation, you would see the key things that suggest the 1980s are not going to revisit themselves in this cycle.

And the two points that I will make is, number one, we just do not have the worldwide crop surpluses that we had in the late 1970s and early 1980s that set up the land value decline and the commodity price declines in that era. If you look at it in a historical context, grain prices today are still relatively high in a historical context. They may not seem high compared to the high points of just a couple years ago, but they really are pretty solid pricing.

The second thing that I would point out is that the farmer balance sheets are much, much stronger now than they were in the 1980s. One key asset, and we in our presentation go through a lot of USDA data; you can look at it at your will.

But the key thing is that the farmer balance sheet today is around 13% debt to assets. It was in the 20%s in the 1980s. So you just have not had the sector lever up, which is one reason you are continuing to see very strong land prices even though operating returns may have been hurt a little bit in recent years.

Now finally I will turn to this recent Illinois transaction; just the facts to start. It's 22,300 acres in East Central Illinois. Those of you who know Illinois, this is about an hour south of Champaign, Illinois, and we will pick up around 19 new tenants on those farms. After this transaction we will be the largest, certainly one of the largest -- it's a hard statistic for us to actually verify, but probably we're the largest, and if not the largest, one of the largest, private landowners in the entire Midwest.

When we look at this sort of transaction, what we have acquired here is really the Park Avenue of US farmland. This is some of the very best farmland in the world. We already owned quite a few acres on the west side of the state. I think it's 7,000 or 8,000 acres on the west side of the state.

So when you think about what will happen to the value of our company and the value of our stock, when we see even the slightest recovery in commodity prices and farmer operating performance, we are very, very strongly levered to have our valuations skyrocket fundamentally when that occurs. We will sign up most of the tenants that -- we hope to sign up most of the tenants who are currently on these farms and keep them in place. It's a very good set of tenants and we're happy to have them join us through this transaction.

The key financial terms of the transaction were $50 million in cash; again, $197 million total purchase price. $30 million of stock, or OP units, which is valued in the transaction at $11.50 a share. $117 million of preferred equity will be issued; that preferred equity will be outstanding for 10 years. It will pay a 3% dividend and we will have the ability at the end of the 10-year period to redeem it, either for cash or for operating partnership units at our option.

We expect the basic rental revenue from this transaction to be around $6 million. That is before you include additional funds we may be able to gain from additional purchasing power for our tenants nationwide, as well as the ability to market some of the grain that comes from these farms. We think, when it's all said and done, we may be able to push cap rates into the low 4% on this transaction.

Given the financing structure that we have in place, this transaction is very accretive. The final thing that this transaction allows us to do is it will allow us to increase our additional purchases by about $100 million. We will spend that $100 million in areas that provide diversification away from traditional row crop in the Midwest, so it will either be other regions or, equally likely, specialty crops.

So when we look at this transaction we think it is truly transformative for our company. It gives us a significant increase in scale, significant increase in revenue, and an ability to get materially higher diversification, while at the same time capturing some of the very best productive assets that play into that key theme of global food demand and land scarcity.

With that I will stop and turn it over to you, Luca, for some comments specifically about the financials.

Thank you, Paul. The third quarter of 2015 has been very important to our company. The big event of the quarter was an underwritten public offering in July in which we sold 3.360 million shares of common stock at a price per share of $11, generating aggregate net proceeds of $34.6 million. That is net after deducting the underwriting discount, commissions, and expenses.

In the third quarter, we acquired and put under contract five farms in five states totaling over 3,900 acres. This is a slower acquisition pace than the other quarters, but reflects the seasonal slowdown in farmland transactional volumes.

On the debt front, during the third quarter we issued to Farmer Mac a $6.6 million five-year interest-only bond with a fixed interest rate of 3.35%.

Before talking about the third quarter's financial results, I'd like to give a few additional details about the transaction we announced last night that Paul just discussed. As announced, the consideration will consist of $50 million in cash, which we intend to fund with new debt at closing; $30 million in common stock and partnership units, both valued at $11.50 per share or unit, with the exact mix to be determined prior to closing; and $117 million in a new preferred equity security at the partnership level.

This new Series A preferred equity will pay cash dividends at the rate of 3% per year payable on January 15 each year beginning in 2017; will be callable by us for cash at face value beginning with its fifth anniversary; and will be redeemable for common partnership units beginning with its 10th anniversary at each holder's option. Between the call option and how partnership units get redeemed in our company, effectively it will be ultimately our option whether holders of the Series A preferred equity will receive cash or publicly-traded shares.

The conversion ratio from Series A preferred to common partnership units will be based on our stock price at that point in time. Solely because of this valuable conversion price 10 years or more hence, which we actually see as an attractive characteristic of this security, this preferred equity will be shown as mezzanine on our balance sheet rather than equity.

Thanks to the significant equity component in the consideration for this transaction, as Paul explained, this acquisition should enable us to acquire approximately $100 million more in assets through leverage.

Now let me turn to our third-quarter 2015 financial results. As I cover some of the key highlights, please refer to our earnings press release for more details.

For the third quarter, we recorded rental income of $4 million and net income of $0.9 million. For the nine months ended September 30, we recorded rental income of $8.9 million and a net income of $0.8 million. Actual cash rent receipts for the three and nine months ended September 30, 2015, were $0.8 million and $14 million, respectively.

As of September 30, 2015, the Company had $7.4 million in deferred revenue, $3.5 million of which will be recognized during the remainder of the fiscal year ending December 31, 2015. Like many other REITs, we look at certain non-GAAP measures, particularly adjusted funds from operations or AFFO, as additional measures for our performance. We calculate FFO, funds from operations, consistent 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 and certain acquisition-related expenses. Our AFFO was $1.8 million for the third quarter and $3.9 million for the nine months ended September 30.

On a fully-diluted weighted average basis, AFFO per share was $0.11 for the third quarter and $0.32 for the nine months ended September 30. When we calculate per-share non-GAAP measures on a fully-diluted weighted average basis, we include units in our operating partnership, which is our main operating subsidiary, because of their 1-to-1 parity with our public-traded shares.

On that basis, our fully-diluted weighted average share count was 15,475,864 for the third quarter and 12,016,245 for the nine months ended September 30. As of September 30, 2015, we had 16,157,855 shares outstanding on a fully diluted basis, which remains our share count today.

This concludes my remarks on our operating performance for the third quarter of 2015. Thank you for your time this morning and your interest in Farmland Partners.

Operator, we would like to begin the Q&A question.

(Operator Instructions) Dan Altscher, FBR.

Good afternoon. This is actually Tim Hayes for Dan Altscher. Does the magnitude of the acquisition impede your initial expectation for the trajectory of the new loan program? I believe the loan was about $2 million made in the quarter. Should we expect that to be the quarterly rate for the time being or how do you see that ticking up?

We would anticipate that the loan program will accelerate somewhat from where it is today. It obviously will always be a somewhat modest program for us because what we are really doing is we're being a lender to farmers when their traditional lending sources are not available to them. We, of course, want to get a relatively high return on those loans and we want them to be secured by land, so our safety and our risk is as strong as possible.

So we would anticipate -- the transaction we just did doesn't increase or decrease, per se, our ability to do loans. It's the loan program will continue to grow, but I wouldn't expect it to grow at a really rapid rate over time.

Okay, understood. Then back to the acquisition, when do you expect the Illinois farmland acquisition to close? And it looks like you also acquired five other forms post quarter end. When do you expect those to close as well?

So the large East Central Illinois acquisition, which for the purpose of this phone call I will call it the Paris, Illinois, acquisition, because that's the county seat of one of the counties where this transaction is based. It's Edgar County, Illinois.

We would expect that Paris, Illinois, transaction to close probably during the month of January. Hopefully in the first few weeks; could take until the first week of February or so. It's obviously a very large transaction with quite a bit of title work and all the rest that goes into a large property closing to get done.

As far as the other five transactions, I don't have the exact closing dates on those. Luca, why don't you give approximately what's going on there?

Sure. We expect the majority of them to close yet in the fourth quarter of this year. One possibly will close in the first quarter of next year -- one, maybe two. But it will be very early, probably in January.

Okay, thank you very much.

Dave Rodgers, Robert W. Baird.

(inaudible) here with Dave. Paul, the rent per acre on the Paris, Illinois, transaction looks to be about $270 per acre and I think the rent you charge yourself for the farms from the IPO was $425. Can you just talk a little bit on the quality differences there and maybe some of the rent escalators you might expect?

So I didn't do that calculation the way you just did it, but I will take it at face value. The rents on the farms in the Paris, Illinois, transaction will be anywhere from around a high of $400 or a little higher on the very best tracks, the Class A tracks with high productivity indexed soils, to a low in the neighborhood of $275 or so per tillable acre. That is kind of the expectation we would have.

What you're getting with your $270 is on a farm this big there's some number of non-tillable acres. I forget what that number is. It's I think almost 1,000 acres non-tillable, which it sounds like a lot of acres but it's not actually not very much. Almost no farm is 100% tillable, because there's always a roadside ditch or even the township road is usually owned by the landowner and you pay taxes on it, even though it's got a highway on it instead of the road.

So it's -- that's the kind of the rent we expect per tillable acre, which is actually consistent with good rents in the state.

You made a comparison to the rents we had at the time of the IPO. The IPO market -- at the time of the IPO it was a slightly different market. We were coming off some of the higher prices we've seen for corn and soybeans and the highest profits we've seen for operators.

So those rents were, for the recent years, sort of at the high point and they've now kind of tempered a little bit from there in terms of the markets. Although, as you can see from those numbers, they haven't tempered that much.

Again, the power here in this transaction, though, is to compare it to office space in New York City. If you had an opportunity to become the single-largest Manhattan -- Midtown Manhattan office owner, you would be thrilled with the fundamental operating leverage and upside that creates for you in terms of scale and position in the market. We have been able to accomplish that here with a very, very good financing structure at purchase prices that aren't high.

We have got very good value. We weren't able to steal these farms, by any means. It's a sophisticated wealthy seller, but he had enough confidence in us to do this financing structure with us as well as to sell us these farms at a fair price. We are thrilled with somebody who's got this much family legacy in farmland showing that sort of confidence in us as a company and a management team.

Great, thanks. So using that New York kind of analogy, I think our back-of-the-envelope math got us to about mid-30% Corn Belt exposure by acreage following this acquisition. So how you think about that balance going forward? If New York is not an option, which -- in terms of the analogy, where do you go next?

We are -- obviously you heard my comments about our theory on building the portfolio. We are, post this transaction, overlevered, if you will, or overexposed to the Corn Belt and I wouldn't say it any other way. I'm pretty straightforward in my presentation and my views.

We will moderate that quite quickly, probably before the growing season next year even gets started, but when this kind of opportunity comes along, you have to be opportunistic. But we would have more total exposure on a value basis, which is how we actually look at it, not acres, than we should given the size of our existing portfolio to corn belt.

But that means the new acquisitions we do post this transaction will be focused in the southeastern United States, in the Delta, which actually trade on a somewhat different basis because they have different crops and they also have different other characteristics. And you should expect to see us expand into the specialty crop areas, so we get that balance into our portfolio here in the coming months.

Thank you.

Rob Stevenson, Janney.

Good morning, guys. Paul, can you talk just a little bit about the seller's motivation to take back stock in OP units valued above where the stock has been trading, and then also a 3% preferred? Is it -- obviously a great deal for you, but what was the motivating factor there for the seller to take that type of securities back?

This is one big family, but it's a series of sellers, just to be clear. It's not a seller; because it's a patriarch and then children and so on and so forth that have control of these various properties. So it's a family unit, not just an individual.

But to answer your question, what motivated the family, and it's really pretty simple when you think about it, is -- the other major transaction we had done with the James/Justice family was somewhat similar in their reason for taking OP units. They get a substantial tax benefit in terms of the carryover basis in these OP units and they get that tax benefit on both the regular common or traditional OP units and on this preferred equity security.

So round numbers, thinking 28% tax rates, capital gains and things, and the like, there's a $30 million or $40 million tax benefit for the sellers here in this transaction structure. That is a huge motivating factor for them. That's the power of the REIT structure -- not just for us, but for any company -- and that's what allowed us to get what might appear to be very, very good terms. And they are good terms, but when you factor in that tax benefit it goes a long ways to explaining why the seller would agree to do this thing.

Then on the stock price itself, we believe we are trading below NAV. It just kills me as a large shareholder personally to issue our securities below NAV. I don't think we got clearly up to where we want to be from an NAV perspective, but $11.50 a share, which is our negotiated number in this transaction, it sure a heck of a lot better than wherever it closed yesterday, which was $10.15 or $10.20 or whatever it was. So we feel good about that; that's just kind of hard-nosed negotiation on our side.

The other thing I would offer is, all of you who have been in our stock for a long time, the amount of underwriting discounts we pay, the amount of discount we take after we announce a public transaction, it's very, very frustrating -- 7% to 9% sometimes. This is a way better way for us to add equity to our balance sheet than that sort of structure. No offense to my friends on the phone who are investment bankers, but this is just way better for shareholders to do it this way.

Okay. And then on the solar and wind initiatives, how much capacity is there within the existing portfolio, you think? Or is this mainly going to be a component of stuff that when you analyze prospective deals coming across your desk you will evaluate it for that?

We don't spend very much time in the context of prospective deals thinking about solar and wind and the like. The reason we don't is that if you start to do that you're going to find yourself being a development speculator, not an ag guy. So we underwrite to ag return and ag value is our general approach; and then once we control a property on a basis where we like the return from an ag perspective, we start to look for ways to enhance that return from any higher and better use.

As far as our portfolio wide, it's very hard for us to give a specific number, but we believe there are substantial additional wind opportunities and solar opportunities around the country on our properties. There are, of course, frequently new power lines, new gas lines, other sorts of easement opportunity.

And in the ag world the traditional deal there is you get paid the full value of the acre and you are not really giving up the acre in that easement. You give it up for a year while they are constructing the pipeline, for example, but as soon as they are done constructing it you get the acre back, even though you were already paid a fee to let them put the pipeline in. So we are always looking for those opportunities.

And then obviously we have a small a lot of land scattered around the country where it's on main highways or near major cities or growing towns and there's always development upside. So I think the way an investor should look at this is: if you think about our ability to raise rents, you can raise rents because the ag economy is booming and that's one way to get higher rents, but then there's this other sort of value creation opportunities which are effectively also raising rents, just through a different way.

And so you should see us pushing on both opportunities to keep some decent level of rent increases going, even when the farm economy itself doesn't necessarily support much rent increase.

Okay. Thanks, guys. I appreciate it.

Craig Kucera, Wunderlich.

Good morning, guys. I appreciate the color on what the anticipation is for acquisitions next year, but I do want to circle back on some of your key assumptions regarding the $0.10 of AFFO accretion from this transaction. Can you give a few high level details on that?

Yes, I will give you the high-level details. Basically, how you should be looking at that is the acquisition we did will yield in the neighborhood of 3.5% cap rate, maybe up in the low 4%s, as I said a few minutes ago, depending on the things we can do with this scale. Then what you'll see is the acquisitions we do with that other $100 million will be in the 5%-plus cap rate area, which is typical of returns in the other geographic regions that we're likely to focus on or of specialty return.

Some of those cap rates can go as high as 6% on some of those transactions, which would probably be close to its upper limit. So when you blend that all together you can crank through some sense of the per share return and also taking into account the financing structure here, and you will end up coming up with something that's conservatively in the $0.10 a share basis.

On this point, because maybe people have asked me, we do not have guidance that is valid in the marketplace today. Ever since we did the follow-on offering in the mid summer we have not had guidance that was updated.

One of the reasons is that we were already in the throes of this transaction we just announced yesterday at that point in time so we were uncomfortable updating guidance given that we were mid negotiation of something so big. Now that we have that out, you should all expect some level of guidance to be put into the marketplace and you folks on the equity analyst side. We will let Luca and his team get a night or two of sleep and then they will focus on that. Hopefully in the next month or so we will put guidance back out in the marketplace to help everybody since we've been growing so fast.

Got it. And when you think about how you're going to finance yourself on the debt side, are you going to continue to use more shorter-term debt or are you anticipating terming things out at all?

You should assume this -- preferred equity, as we all know, is kind of -- oddly it's sort of partly a debt. People think about it economically as kind of like a debt and kind of like an equity. It's a little of both, as we all know.

So that's a 10-year security at 3%, so that's a very good rate, a very long term. You would expect to see the rest of the financing we do on this transaction on a materially shorter basis to try to blend those two things together; we think is kind of the appropriate risk management approach.

I don't know our exact duration of our existing debt structure. The original First Midwest debt is rapidly coming to the end of its term. It's some of the higher rate debt that we have, so I think our weighted average maturity is 3.4 years. Luca just handed me a piece of paper. But that is significantly pulled down by that first (inaudible).

Frankly, we take that First Midwest Bank debt out of it, it would be somewhat higher than that. Maybe in the 4%s or 5%s.

Okay, appreciate the color. Thank you.

Jim Young, West Family Investments.

I'm just trying to better understand the potential economics out of this Paris transaction. When you say that this is like the Park Avenue of US farmland for the 22,300 acres, could you just give us a breakdown of what percentage is corn versus soybeans that's currently being farmed? And what kind of yields are the farmers receiving currently on the acres that they are farming in these acres? Thank you.

Sure. It would be in the neighborhood of 50/50 corn versus beans. That would be the traditional rotation cycle in that part of the United States.

That being said, the economics for corn for most farmers are almost always better than beans, so there's always a bit of a thumb on the scale on the corn side. So 50/50 is what people would say off the top of their head, just like I did. Realistically, it's probably closer to 60/40 because people will occasionally due two years of corn instead of just a direct every-other-year rotation. So think of it as maybe 60/40 corn.

There will be a smattering of other crops in here. There is some seed corn grown on these farms, which is a high value-add crop. There is some seed beans grown on this farm. There is some what is called milling corn. That's grade -- instead of number two corn which is commercial corn for livestock, there's number one corn, which ends up in human consumption.

There is some number one milling corn because there's a facility -- I forget which of the companies. There's a large facility nearby the grinds that corn to make corn meal and corn bread and things like that. So there's some value-added crops mixed in here.

There would also be occasionally a small amount of wheat or some other crops mixed in it, but it will be relatively de minimis. All of that stuff would never be probably more than 10% of the total acres there.

In terms of yield expectations, there are kind of three broad categories of soil quality on these farms. They are As, Bs, and Cs. Just recognize an A, B, and a C in Illinois or Iowa is probably better than the As in most of the other states in the country. So you got to keep that in mind.

But the A soil quality stuff in Illinois it would be not unusual to get 220 bushel corn and 70 to 75 bushel beans. That is obviously good weather, good year. Low for those fields would be maybe 190 corn; that would be a year where you struggled a bit and you didn't have perfect weather. And beans down the kind of high 50s or low 60s would be the bottom end of the range on the As.

The Bs you'd still hope to get 200 bushel corn, but sell them at 220 and you'd have on a bean yield more like a 60 or 65. On the Cs, C soils have a lot to do with drainage and whether there's any nearby timber which shades the cropping ground and hurts yield. These Cs tend to be great big fields that are square and nice and easy to farm, even though the soil qualities are a little lower.

Also, a lot of the C ground on these farms is irrigated ground, which changes everything. An irrigated C is equivalent in productivity basically to an A. But C, assuming not irrigated, you'd be looking at a 185 corn yield target and probably a 50 bushel bean target, if that helps you.

So how does the 22,300 acres breakout between A, B, and C category of land?

I don't have that right at my fingertips, but roughly two-thirds A and the rest is B and C. Something like that.

With the 19 new tenants, does that suggest that you have 19 contracts for this 22,300 acres?

Yes, we will probably -- our culture as a company is to give the men and the women currently farming a farm first dibs. Now, obviously, we look at our business and we say we have two constituencies: constituency number one is you guys, our investors; constituency number two is the farmer. But we have to treat both fairly and with respect and so we have certain financial targets that these tenants are going to have to meet to stay with us. But we will do what we can to try to let as many of them as possible continue to stay with us.

If not, we have -- because of some of the diligence we were doing, this transaction has been known in the farm community in that part of Illinois for a couple of weeks now. We met with some tenants a few weeks ago, and so we have had, literally, dozens of calls people wanting to rent these farms if the tenants that are currently on them don't stay. Like I said, our policy and philosophy as a company is to give the guys that are currently on it first dibs. But, if not, we've got plenty of backup tenant opportunities.

That is -- back to my reference to this being the Park Avenue. There is -- in Illinois it's kind of a joke among people in Illinois, but literally you could be at a funeral or a visitation after the death of a person and there are people trying to rent that land away from the family. It is a very aggressive tenant market, which is one of the strengths and the power of that region from a landownership perspective, which is why rents are high as well as land prices.

Okay. And so what are you assuming? What needs to happen for you to get you up to that 4% cap rate that you suggested is possible?

There is a couple different -- there's two broad categories. We've been working pretty aggressively to help our farmers lower input costs and when we do that we can make some money as well, so that's category group one. Can we drive -- help drive down the input costs for this group of tenants with that much concentrated landholding in a given area? To say nothing of the Illinois landholding overall.

The second group is we've also begun to work pretty aggressively on how we can pool the offtake from this farm -- from these farms and increase the farmer profitability by trying to negotiate premiums for the delivery of this quantity of grain into the distribution channel and we've opened a bunch of doors there. If we can pull those things off -- and I don't know if we will have them pulled off in the 2016 year, but I can say pretty certainly we will eventually pull them off -- there is a material enhancement to the return that we begin to get as we continue to grow scale as a company nationally.

Just use an example, and it's not specifically related to these farms because this just happened. As you all know, we own a lot of farms in the southeastern United States. The southeastern United States is a chronically corn- and soybean-short region because of the amount of livestock feeding for chicken and pork in that region.

We have begun conversations with the consumers of that grain where we could sell our grain from those farms and help the farmers sell the grain from those farms directly into those consumers. And when we do that, it's a substantial profit enhancement for both the farmer and for us as a landlord. So that's the kind of thing that has a chance of pushing these returns up quite a bit.

Okay, thank you.

Laura Engel, Stonegate Capital.

Good morning. Thanks for all the good information. I know we usually give Luca a little break, but focusing on some of the numbers, I think I heard maybe a $16 million number for a top-line possibility for the year. And then if you could comment, although you say not expecting material increases for some of the larger overhead line items such as G&A and some of those items, maybe what we could expect for the remainder of the year as we get all these acquisitions brought on board and kind of consolidate some of the operations. If you can comment on that.

Let me comment on it a little bit. The $16 million you heard in a comment that I made, where that comes from is that we are running at roughly $4 million a quarter of rental income right now; you can see that in the earnings release. And that's kind of our run rate.

I won't take you into a difficult accounting equation, but the way we record revenue on transactions that we do midyear, we don't necessarily get all of that revenue into that calendar year. It's just a function of GAAP. If you look at our AFFO numbers there is that cash recognition add-back of the actual rents we've received as opposed to the GAAP number.

So the $16 million comes from thinking about 4 times 4. It's really not much, really any more complicated than that. The fourth quarter of the year we should be able to maintain the same sort of steady-state cash rents and, in fact, they ought to hopefully be even a little bit higher because that is the quarter where we actually receive the share crop rents that we do have around the country. We recognize those in the fourth quarter and so it should even be a slightly better quarter.

As far as specific numbers, I'm going to leave that to when we put out guidance in the future.

In terms of SG&A side, we've scaled our business and built our infrastructure here in the Denver headquarters from an accounting perspective, from a public filing perspective, so we really have the necessary people in place that we can continue to expand without having to expand those important support functions for our business.

The other thing about our model is that the amount of land that a given regional farm manager can handle is really quite high. We today have three farm managers around the country in remote locations away from Denver. We have one in Memphis, we have one in Bloomington, Illinois, and we have one in -- near Burlington, Colorado.

And so when you add these acres, the guy in Bloomington isn't -- we are not going to have to get a second guy. The guy in Bloomington who already covered the Corn Belt in the Midwest will just cover these acres for us as well. So there is very, very significant returns to scale that we will gain and continue to gain as we grow this business.

Obviously, we gradually add employees, but today we're in the neighborhood of 12 employees for 70-some-thousand acres. We go to 100,000 acres post this transaction. We won't end up adding a person specifically for this transaction.

Now, I have some other business extension ideas that might add one or two people to do some other things where we are trying to continue to grow our business, but we really are at a point now where we start to get the real benefits of the economy of scale. And obviously our accounting, legal, public filing fees hopefully don't continue to go up and shouldn't go up just because we're getting bigger.

And then I guess related to that, any anticipated capital improvements that will be needed on some of these acquisitions to kind of bring them on board and get them up to speed?

No, in Illinois generally not likely to have much capital improvements required. Obviously, we've done some diligence on that topic already. The only sorts of things you would do on these farms would be possibly some additional [tiling]. Most of Illinois is a world of excess water, not too little water. There's that small amount of sandy or C class soil I mentioned, which is irrigated, but we don't anticipate any major capital expenditures there.

And importantly, as you think about it from an AFFO perspective, our depreciation and lifecycle on drainage is -- I forget whether we've got 30 or 40 years. It's very long-life assets if you do make those investments, so they don't have a very big P&L hit. And it's not that expensive; it's just the capital outlay.

Irrigation is somewhat shorter, I think 12 to 15 years or something I forget what we're carrying on irrigation, on brand-new irrigation units. But again, not very much in absolute dollars, frankly, and even if we do any of those things they are not big hits to the P&L.

Okay, great. Thank you for your time. I will get back in queue.

(Operator Instructions) There are no further questions at this time.

Thank you very much. We appreciate you joining us. As you think of more questions, feel free to reach out to members of the management and we will try to help you answer those questions. Thank you.

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