Farmland Partners Inc (FPI) 2016 Q3 法說會逐字稿

Good morning, and welcome to the Farmland Partners Inc. 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, Chairman and Chief Executive Officer. Please go ahead.

Good morning, and welcome the Farmland Partners third quarter 2016 earnings conference call and webcast. We truly appreciate you are 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 public filings and press releases. With me this morning is Luca Fabbri, the Company's Chief Financial Officer.

I will now turnover the call to Luca for some customary preliminary remarks.

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 17, 2016.

The phone 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 3, 2016 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 will also discuss certain non-GAAP financial measures including FFO, adjusted FFO, 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 and is furnished as an exhibit to our current report on Form 8-K, dated November 2, 2016.

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 return the call back to our Chairman and Chief Executive Officer Paul Pittman, Paul?

Thank you, Luca. So I'm going to make a few comments about the major events of the quarter as well as a little bit about the state of the market. So starting with the major events of the quarter; obviously, the most important event in the third quarter for this Company was the announcement of the American Farmland Company acquisition and merger. The power behind that merger is that, with that, we have created what is the largest public company in the farmland space. We have achieved significant scale and diversity through that acquisition plus several of the other acquisitions we've done.

Post the closing of this transaction, which is expected to be in January 2017, we will have $850 million of assets approximately, a 133,000 acres approximately, 100 separate tenants. We will have a portfolio that is approximately 75% primarily row crops and about 25% specialty crops meaning permanent trees, citrus and nuts and vegetables.

That is, is our view, the appropriate balance between traditional row crop agricultural and specialty crops. As we have always said, this story is really about global food demand in the face of land scarcity and this gives us a portfolio that on a dollar-weighted basis reflects the approximate US output of agriculture at the production level.

That, we want to avoid as a Company trying to pick winners and losers between almonds and avocados and corn and beans, but to put investors into a broad, diverse, and safe portfolio that represents that global food demand story. The transaction itself is highly accretive to the Farmland Partners' shareholders. It is 10% accretive in the first year, meaning 2017 and approximately 20% accretive thereafter.

The real driver of that is significant cost savings that can be achieved from pooling the assets of AFCO into Farmland Partners' management structure and discontinuing most of the management cost associated with those assets today. The transaction, in my view, will likely happen. I have, at this point, spoken with most of the investors on both -- shareholders for both AFCO and for Farmland Partners their overwhelming support for the transaction. So we certainly expect the shareholder votes to go through later this year.

The Company today, meaning pre-merger, is on a revenue run rate of around $25-ish-or-so-million a year. And post this transaction, we will be around $41 million or $42 million a year in 2017 and that is without any additional acquisitions. So it's likely to be even higher. The importance of that is our business model as we achieve scale moves ever increasing amounts of cash flow to the bottom line and making them available for distribution to shareholders.

This also proves our ability to build a truly significant company in terms of its size and scale. When we close this transaction, we will have done over $500 million of farmland acquisitions in the prior 12 months. Many of you investors who've been with us since the beginning, you have always asked the question of, could we truly scale this business? I think from the standpoint of the investor, we have clearly proven that point and will continue to do so.

Turning now to other acquisitions and what's going on in the market generally, what we are seeing in the market is the ability to do acquisitions at slightly higher cap rates than we have done in years past. When I say slightly higher, I mean literally 0.5% or so, 50 basis points, not a significant decrease in land values out there. We'll talk about that in a minute, but there are -- because of the negative headlines in agriculture today there are less buyers and so when there is a sale, we are usually able to negotiate somewhat better terms.

A couple of examples of how we've been creative to try to increase cap rates of the acquisitions we're doing and I'll just use two examples that we discussed in the press release. We're investing -- in the process of investing actually, around $15 million into a farm in Florida that will produce forage for a nearby dairy. That is the conversion of farm that's currently a quail hunting and timber plantation into irrigated row crop farmland.

We as a Company seldom want to do development that has negative cash flow. So we have structured this transaction in the following way. When we bought the farm, we had already identified the tenant for this farm, they in fact had brought the idea to us. We are working with that tenant to develop the farm as rapidly as possible.

That tenant will pay us a 4% cap rate on our invested dollars during the 2016-year during development, they will pay us a 4.5% cap rate during the 2017 year, which is the sort of key year of the development project. And then, when this goes into full production in 2018, they will pay us 5.75% cap rate and bonuses, depending on the production of the land.

So what we're doing here is still, while maintaining kind of true to our principles of global food demand, we are working hard to gradually increase the cap rates of the portfolio as well as increasing the overall scale of the portfolio, which leads to more profitability for our shareholders. Another example, which is a little bit unique; I mean, I don't want anybody to think this is all we're doing, we're still going the traditional sorts of farm deals that I've explained in the past.

But we're investing approximately $5.5 million into a feedlot here in Colorado for a combination of the infrastructure of the feedlot, water rights and mineral rights. That investment is at a 6% cap, plus bonuses above that. It's a little bit of a unique structure. We actually collect monthly rent in that case. And again, it's an example of how we creatively find and do deals and structure deals to raise cap rate and raise ultimate return to shareholders while creating a very diverse portfolio across that production agriculture story.

Turning to my third topic for this morning which is land values versus the stock price. We now own a large enough portfolio that we have a very good visibility on what's actually happening to land values in the United States. I would say that almost without exception the pundits are writing, what I call the Chicken Little story, meaning the sky is falling and it is fundamentally untrue in the marketplace.

So here is what we're actually seeing. We're seeing occasionally new highs set in auctions and we're also seeing occasionally new lows set in transactions. But neither of those things is really the story. Every one of those deals that is either a new high or some sort of recent low has a real history behind it of some sort.

What's really going on in the broad market is that what we're seeing is at very high quality properties meaning good or excellent designations on the properties are either maintaining value or in fact, slightly increasing. What we are seeing is lower quality properties, meaning in the designation they use in many states what they would call, fair or poor, they are flat to modestly declining.

So, if you're trying to get a handle on what's really going on in land values, I would encourage you to read really one source as your base line and then, you can read all these other sort of pundits, as I call them. But there one source you must start with because it's the only source that I think is really kind of broad in terms of their approach. So the USDA, through the National Agricultural Statistics Services, publishes a nationwide land value survey in August of every year. It is a survey with many, many data points. It's well thought. It's always done in the same form. So it's linearly comparable and you really should start there.

So, when you think of the articles you may have read in the popular press recently about agriculture, I want to give you a few statistics from this. And if any of you have trouble finding it, please contact our office and we can forward a copy of it to you. It's also certainly available in the USDA website. Again, that's the land value survey for 2016. So they record land values around the United States in two significant ways.

They look at farm real estate and another characterization called cropland. And the fundamental difference, if you read the footnotes is, farm real estate includes buildings and other infrastructure and cropland is just land. So we look at both of these things. So, the decline in farm real estate in the United States 2015 to 2016 was 0.3% and I think it is very, very important to put that in context.

Here we are in what is probably one of the more difficult ag production economies that we've seen since the mid-80s and we're down 0.3%, which just makes me what to say, give me a break. I mean I can't believe the amount of people who keep looking for a negative tone in the press, where the reality is nowhere nearly that negative. Looking at crop land only, it's down 1%, again, not a very significant difference. So, I'm going to actually read to you a couple of the state numbers, because again, remember we are diverse nation-wide portfolio at this point.

So starting in places we own an awful lot of land like Illinois, negative 2.6%; Nebraska, negative 4.3%, two of the most corn intensive states in the country, you would expect to see that. But let's go on, Colorado, where we own quite a bit of land, no change. The delta Arkansas, Louisiana and Mississippi where we own also a lot of land, almost as much as we own in the Midwest; up 3% in Arkansas, up 2.3% in Mississippi, up 4.8% in Louisiana.

Now let's move to the Southeast where we have quite a bit of land using South Carolina as an example, no change; Georgia, where we have a growing portfolio, it's up 0.79%; Florida, up 2.6%; and in California, to give you an example where we've added a lot of assets in the American Farmland transaction, up 2.1%.

So the takeaway is, what we had seen is our stock price beat up as if farmland values have declined quite significantly. And when you get under the hood and look at the facts, it is in fact not true. So in conclusion, the takeaway is that this is an excellent point to enter our stock or to enter farmland investments. Specifically, we are trading today at a point in fact where you can get roughly a 5% dividend rate, while you wait and the long-term trend lines regarding the underlying asset in the global crude demand story are fully intact.

The other fact that I would just always encourage people to look at is the real driver of the story is global food demand. And again, the USDA has incredible amount of statistical data here. The demand for US foodstuffs, soybeans in particular, but also corn and many others, including the specialty crops from China is ever increasing.

What this relatively lower price environment for the commodities has created is a surge in demand. When we see a modest shortage of the key crops come back and it will come back because weather is never perfect every year. We will see commodity prices skyrocket; farmland values significantly increase; and in my view, our stock price significantly increase as well.

So with that, I'm going to turn it back over to Luca to walk through some of the key operating and financial highlights contained in our earnings release and then we'll take a Q&A at the end of the call, Luca?

Thank you, Paul. In the third quarter of 2016, beyond announcing the merger with American Farmland Company, we acquired six farms in five states, totaling 3,444 acres and put under contract 1,217 additional acres. Over the course of the third quarter of 2016, we were able to sell 147,600 shares of our common stock under our at-the-market offering program at a volume weighted average price per share of $11.22 and generated net proceeds of approximately $1.7 million.

Now let me turn to our third quarter 2016 financial results. As I cover some of the key highlights, please refer to our earnings press release for more details. For the third quarter of 2016, we recorded total operating revenues of $6.9 million and net income of $0.1 million. Basic net loss available to common stockholders was $0.06 per share. Excluding the acquisition and due diligence costs incurred in connection with the AFCO merger, net income and basic net income available to common stockholders on a per share basis would have been $1.7 million and $0.05 respectively, for the three months ended September 30, 2016.

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 exclude non-cash expenses, such as stock compensation, certain acquisition-related expenses and distributions on the preferred units issued by our operating partnership.

Up to and including the first quarter of 2016, we also made an additional adjustment in our calculation of AFFO and adjusted EBITDA to recognize revenue in the calendar year in which the cash rental payment was actually received, which we refer to as crop year adjusted revenue. In light of new SEC interpretation of rules regarding non-GAAP measures in general and revenue in particular, we discontinued the crop year revenue adjustment for periods subsequent to March 31, 2016.

As a result, the reported amounts of AFFO and adjusted EBITDA for the three and nine months ended September 30, 2016 and subsequent periods will not be directly comparable to the reported amounts in prior periods in which we adjusted for crop year adjusted revenue. For the third quarter, our AFFO was $1.7 million and on a diluted weighted average basis, AFFO per share was $0.09.

When we calculate per share non- GAAP measures on a diluted weighted average basis, we include common units in our operating partnership, which is our main operating subsidiary, because of their one-to-one convertibility into publicly traded shares. But we do not include preferred units in our operating partnership. On that basis, our fully diluted weighted average share count was 19,711,290 for the third quarter.

As of September 30, 2016, we had 19,722,656 shares outstanding on a fully diluted basis. This concludes my remarks on our operating performance for the third quarter of 2016. Thank you for your time this morning and your interest in Farmland Partners.

Operator, we would like to begin the question-and-answer session.

(Operator Instructions) Jessica Levi-Ribner, FBR & Company.

Hey guys, Ted Beachley here for Jessica. So my first question is, what pace of acquisitions can we expect pre and post AFCO deal? Will deals pickup in the fourth quarter as they usually do or will the AFCO deal mute them?

So, I think what you should expect is that we will have a slightly slower fourth quarter than you might have expected. We obviously are a very acquisitive company, but when we digest the transaction of the scale of AFCO, it's a little bit like the rabbit through the python and so we have to obviously devote a lot of attention to getting that deal done. So I would expect us to be as acquisitive, probably not the same rate you might have seen last year.

Generally though, the more general acquisitiveness question, you should expect to see us continue to be very acquisitive as a company. One thing I want to point out though, that does not mean we are going to issue a whole bunch of equity at some enormous discount to create a bunch of cash to buy farms. As I referred to in my prepared remarks, we've done $500 million of acquisitions in the last 12 months. Only approximately $50 million of those acquisitions were done with cash raised by equity sales on Wall Street.

We were doing most of those transactions through creative structurings and the issuing of OP units, often at a premium to current market at the time we issued those OP units. So while we will continue to be acquisitive, we have no desire, and as you all know, I'm a large shareholder, to destroy shareholder value through low priced equity issuance.

Okay, thank you. And on a different topic, I know you guys went over this a little bit, do you see any potential risk to land value in any one region or geography? And specifically, do you have any concerns with AFCOs land in California, which I believe you guys mentioned in the past, you had concerns over water. So I was just wondering, your thought from that.

Yes. So, let me take those in reverse, so California first. AFCOs assets in California are of overwhelmingly high quality. The definition of quality in California is largely about water. Those farms were properly diligenced. AFCO as a management team and their management structure was quite effective in finding good acquisitions. Their fundamental problem was they got trapped way too small as a public company and they had an inability to grow with a relatively high SG&A drag on their revenues.

So we don't really have any concerns but that is a very -- the general issue about California on water is a good one. But on a property specific basis, through proper due diligence and buying in the right districts and the right locations, you can largely mitigate, if not completely avoid that problem and we're pretty confident that we have done that with the AFCO deal.

Turning specifically to land values; my sense is, in the intensely farmed regions that are very focused on primary commodities; corn, soybeans, and wheat in particular, you will continue to see a gradual decline in land values from year to year until we see the farm economy recover. So, the first reason for that is that the leading drivers of farmland value are farmers themselves and as their profitability as operators is hurt, they become less acquisitive therefore drying-up some of the demand.

On the other hand, you are not seeing any significant number of distressed sales. We don't anticipate seeing those sort of distressed sales. What happens in the farmland markets is when the economy is tough in a given region in the country for agriculture, you will see flat to very modest declines in land values until it recovers. So again, I want to emphasize what modest is.

So, I mean I keep reading these datasets about 10% down or articles about 10% down in all of this. I mean we study this all the time and that's why I cited those USDA reports. No one doing a really broad survey of land values in any region of the country is finding any double-digit declines at all. And it is actually rare to even find high-single digits.

My view was we would see 2015 to 2016 land values, I think I've quoted in some of our earlier conference calls, saying something like 3% to 5% down and we didn't even get that. And so, our view is that you're not going to see significant pressure anywhere and importantly, as a nationwide portfolio like we have today, we actually think you will see gradual increases in lands values 2016 to 2017. Hope that answers your question.

And I would like to add to that that the resiliency of land values shouldn't be surprising, given that the fundamental story behind farm values which is global food demand is completely unchanged and continues to progress and the conditions of the farm economy are relatively short-term, kind of noise in the context of our asset value although they are certainly, to some extent, hurting operators.

Let me actually pick up on -- add to that even though you didn't ask. So the idea that these farmers are having a truly horrible financial result this year is also wrong. That is, when people talk about farm income, what they're doing is they're pulling a statistic that's reported by the USDA in particular out of context. And when you say farmer income, what you're not saying is that somebody has analyzed all of the 1040s of the farmers and seeing what their income is.

What they're doing is, they're saying on average price for this year multiplied by last year's production and last year's cost structure, the farmer profitability went up or down. That's what that statistic is. I mean people are -- I can't believe the number of reporters who don't seem to read the footnotes. It's not really what any of us on this call would think of as income. It's just a metric that they use.

What's actually happening is farmers input costs have gone down, their yields have gone up and there was a marketing window this year where people could sell corn at, for example, $4.25 and achieve a cash price of $4.25. We have many farmers amongst or 100 tenants who are having a relatively profitable year, this year, because the yields are huge. I mean the [other thing] to talk about corn price, it's actually revenue and profit per acre that matters to the farmer and one of the reasons we're having lower corn price is that we are having a production that is in the neighborhood of 15% to 20% above norm.

So you're not reducing true income, meaning if you did look at the guys cash, true cash flow or 1040 in any real significant way, because you're making it up on volume even though corn price, bean price et cetera is down.

We can go on to the next question, I think.

Robert Stevenson, Janney Montgomery Scott.

Hi, this is Hersh Shintre. I'm on Rob Stevenson's team. I was just wondering if you had any visibility into dry powder post transaction.

Yes, when we finished up this, so dry powder, again remember my comment that we have unlimited dry powder when we can find parties that are willing to take OP units and transactions from us, which we've been quite successful at doing. I mean this Company overall [run at] $850 million of assets. We have probably acquired something in excess of half of those assets with OP unit-based transactions. So we're actually pretty good and pretty effective at that.

But as far as specifically dry powder post the acquisition with AFCO, they were less levered than we think is appropriate. We will raise some additional cash by putting additional debt on those assets. We've already got that loan in place and committed to buy a lender and that will put us back and the ability to do something in the neighborhood of $30 million to $50 million of cash-based transactions if we choose to. And so, that's the update there.

Thanks. It's really helpful.

Richard Schiller, Baird.

Hey, good morning guys. My question is around the AFCO transaction. How has the integration of the company gone so far? And what inning would you guys say you're in in merging the companies? And if you could do a refresher for me like your G&A expectation is post integration.

Sure. I'm going to answer this in a very general and high level and then I'll turn it over Luca, if he wants to add any more specifics. So, just to get -- again the baseline everybody, both of these companies from a personal perspective and the complexity perspective are small and simple. We have in the neighborhood of 15 or 16 employees. I believe American Farmland had 10 to 12. We are letting all but one of their employees go in this transaction. So from the standpoint of integrating the personnel and all of that, it's not particularly significant job.

What that does mean is the duties and responsibilities of the AFCO employees who are going to leave need to get transferred to our employees. That process is well underway and pretty easy to do and I would say if you looked at it, given last night's events, we'll say, if you look at it like a baseball game, we're in the seventh or eighth inning of integration, would be my sense of that. Obviously, the last part of this can't be done until the acquisition actually occurs.

In terms of the question about synergies; on day one, we achieve essentially half of the synergies of the Company -- of the acquisition through the discontinuation of the employment of quite a few people in New York; the shutting down of the New York office of AFCO; the outside law firm, outside accounting firm, all of those sort of costs go away. There are some outside consulting agreements with a couple of parties that will take longer period of time to get out of and that's kind of the second stage of accretion comes when we move beyond those third-party consulting agreements. Luca, anything to add on that?

Thanks, Paul.

(Operator Instructions) Gentlemen, I'm not showing any further questions this morning. So, this will conclude our question-and-answer session. I would like to turn the conference back over to Paul Pittman for any closing remarks.

Thank you again for participating in our conference call. If you have any further comments or questions going forward, I want to make one mention and you'll be able to see this on our website in the coming days, if it's not already there. We have a gentleman that works in our Company named Clay Stockett that many of you have met in the past year-and-a-half or two. He has been with us almost since the Company went public.

Clay has historically played the role of our Financial Planning and Analysis professional. We are shifting him into a role as an IR professional to give all of the investment community a key point of contact, to get basic questions answered and to understand our reported information. So feel free to reach out of course to Luca or myself, but in addition, feel free to reach out to Clay in the coming months and years.

He does -- because of the role he played with us understand the financials and the outlook and the prospects of the Company quite well. I think he'll be a good resource for everybody on Wall Street. So thank you very much and look forward to talking with you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.