Farmland Partners Inc (FPI) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Farmland Partners Inc. Q1 Earnings Conference Call. (Operator Instructions) Please also note that this call is being recorded.

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

Thank you. Good morning, and welcome to Farmland Partners First Quarter 2017 Earnings Conference Call and Webcast. We 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 public filings and press releases. Please refer to the Investor Relations section of our website at farmlandpartners.com for our first quarter 2017 earnings call supplement presentation. We will speak to that presentation later in the call. The link for the presentation is directly below the webcast link and is also posted under the Presentation section of the Investor Relations portion of our website.

With me this morning is Luca Fabbri, the company's Chief Financial Officer.

I will now turn 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 today. The press release announcing our first quarter earnings was distributed yesterday evening. A replay of this call will be available shortly after the conclusion of the call through May 23, 2017. 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, May 9, 2017, 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 markets.

We also will 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 first 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 as of today, May 9, 2017.

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 had filed without -- with or furnished to the SEC.

I would now like to turn the call back to our Chairman and CEO, Paul Pittman. Paul?

Thank you, Luca. So just a few introductory comments and then I'm going to turn to the specific slides that we have prepared. We once again have had frankly, a good strong quarter, although not -- it does not exactly show up in the reported financial results at the profitability level. The revenues, of course, are still quite strong. We'll talk about the reasons why in a moment, but largely it's due to the messy nature of closing an approximately $250 million merger during the quarter. We have -- by closing that merger, we have achieved the scale and diversity that we would like to see in our portfolio and continued the strong growth of the company.

With the termination of the Prudential agreement that occurred at the end of the quarter, we have fully integrated the AFCO acquisition into the total Farmland Partners company, and we've been able to do that frankly, about 1 year to 1.5 years in advance of what we had modeled and expected. And that should yield substantial positive results for us going forward.

The -- in terms of the sort of big trends that drive our business, demand for food stuffs on a worldwide basis, land values, so on and so forth, we're frankly, quite comfortable that the long-term trends are still intact in terms of the row crop region of the country. In the Midwest, we are certainly experiencing headwinds that you all read about in the newspaper. But this is today, a very large and diverse company and on a nationwide basis, we have as many regions, frankly, performing well as we have regions that are struggling. To give you an example, all of the moisture that has hit the West Coast of the United States is going to lead to a relatively good production and yields for our -- for the specialty crop portion of our portfolio, which balances out the challenges of low commodity price in the Midwest.

Turning now to the supplemental slides that we have prepared and I'll start on Page 3. We've started to prepare kind of a standard set of supplemental slides and we hope to continue doing this going forward to try to enlighten investors about what's going on in the company that may not come through clearly on the reported GAAP financials. So what you see on this page is quarter-over-quarter comparison of key metrics, and since you can read them I won't go through them all, but I want to point just a couple of things out.

So on a GAAP basis, revenues went from just under $5 million to approximately $7.2 million. That's something we're quite happy with on its face, and I'll turn to some adjustments to that revenue number in a moment. But we're pretty comfortable with the continuing top line growth of the company. We think it represents our continued effort to drive toward scale and the adding of specialty crops through the AFCO acquisition.

We also started to report net operating income, and I think this is the first quarter we've actually put this number out. The reason we've decided to do this is we know that many of you who track and follow other REITs, use this statistic and spend quite a bit of time focusing on it. So we've decided to start calculating it and reporting it every quarter. What net operating income means basically is that it's just our revenues with the property operating expenses subtracted from them, and those property operating expenses are largely property taxes and direct repairs and maintenance to those properties. There are a few other small items in there, but it's a pretty clean number that directly represents cash flow after property taxes and direct repairs and maintenance coming from individual properties.

Moving to Page 4, which is the first -- this is taking these 1Q 2017 revenues and adjusting for the timing of transaction closings and lease renewals as well as adjusting for the major lease terminations, which we were paid for in the fourth quarter. How I think about this page is for, in particular, the equity analysts who are running models and which may -- which are very hard to predict the exact timing of leases and property closings. What we're trying to do here is to help you understand on a stabilized rental income basis for the purposes of how you model the company, what would've happened if you take the timing factors out of the situation. So to put this all in context, in the first quarter, we have collected $17.1 million of rental income. That's the actual cash collected. A lot of that flows through our P&L, through straight lining of revenues, through the rest of the year. And I think it's important to have that number in your mind to give you context about what we're going through on this page. So if you look at the first sort of green bar on the page, you see the GAAP revenue of $7.15 million. Because we closed the AFCO transaction on February 2, there is a $510,000 amount of revenue that is frankly, permanently trapped in the stub year AFCO financials. We collected that cash at the closing. We got that money, but it will never show up in our revenues. So that's the first adjustment, $0.51 million the effect of the AFCO acquisition having been closed mid-quarter.

The next 2 adjustments I will speak about at the same time because they're very, very similar. The first one is the effect of acquisitions we closed mid-quarter. And again, the effect of straight lining, which is the GAAP requirement on the reported revenue numbers. So to use an example, if we closed an acquisition on March 1, we will still collect the rent for the entire calendar year in that acquisition. So -- and this is very customary in agriculture that you get paid for a season, not for a month or a series of months, but for an entire season, but because of straight lining, what will happen is we will not be able to report in the first quarter the first 2 months’ worth of revenue on that farm and so we will only be reporting 1/3 of the actual cash we received approximately in rents for that quarter through the GAAP financials. So that's again, an adjustment of approximately $0.67 million.

The next adjustment of $0.63 million is really very, very similar adjustment. And an example of that, to give you one, is if we have a lease expire and many of our leases expire roughly December 1, that's when the harvests have been completed in many of the crops and farms that we own. And if we do not put a new tenant on that property until, for sake of example, February 1, we will lose in reported GAAP financials 2 months’ worth of revenue. In terms of the actual cash flow, we didn't lose anything. That's quite -- again, quite customary in the industry. Use Northern Illinois as an example. You get paid the entire rent even if you re-lease the property on February 1. Because the farmer doesn't actually care about leasing that property when there is snow sitting on the ground. And so this is quite customary, again. We're, frankly, trying to clean this up in our leasing process, so our GAAP financials will be tighter with the actual cash results. But the reality is, that we lost about -- because of timing differences of re-signing leases, we lost about $0.63 million of actual reported GAAP revenue even though we collected the cash. Then the final adjustment -- the final adjustment is, as you all know, or many of you at least know, in the last quarter of last year, so at the very end of '16, we collected approximately a $6.5 million termination payment for terminating a series of leases and then re-leasing those farms. When we re-leased those farms, the reason we collected the termination payment is we frankly, re-leased those farms at lower rates than we had them leased at, but we -- but if you had continued with the prior leases, which, of course, we got paid for, you would've had an additional $620,000 of revenue in the quarter. So when you add this all up, on a stabilized rental basis, we had about $9.6 million of stabilized rental income in the first quarter, that's the absolute sort of cash results that if you take all this noise out that we would have had and that obviously would have affected AFFO, and AFFO per share and all the other statistics further down the P&L.

Now one note of caution for everyone. Please do not take this number and just multiply it by 4, and assume that that's exactly where we're going to be going forward. This -- obviously, every quarter is different, every quarter has some changes, but we thought this was -- give you an example of how to think about modeling and forecasting the business. Internally, the way we kind of think about our business to at least try to lessen the noise and manage better is we look at farms we have owned for a year or more and we think about them really differently than the -- and the cost that we associate with those farms and managing those farms than the farms that we have only owned for a few months. Because once we own a property for a year or more, we generally start to wash all the GAAP noise out of the financial -- out of the reported numbers under GAAP, and the cash flow numbers we actually receive start to line up, frankly, better. So I hope this is sort of helpful and informative. During the Q&A, feel free to obviously ask any questions about it.

With that, I'm going to turn it over to Luca to handle Page 5.

Thank you, Paul. I'm now on Page 5 and I also won't go through every single number on the page, but I will just highlight a few, kind of key figures and facts.

First of all, in terms of our common equity capitalization as of the end of the quarter, common shares were about $32.4 million, common OP units were about $6.7 million. Given the interchangeability between OP units and common shares effectively, due to the umbrella partnership, REIT structure of our company, when we think about the float of the company, we really thinking -- think of it including both common shares and common OP units. So with a total of 39.2 million shares on a fully diluted basis.

The -- so thinking about the equity capitalization of the company based on yesterday's closing price of $10.80, the equity would be $422.8 million. Once you add the preferred OP units that we have outstanding for about $118 million and net debt of about $430 million, the enterprise value of the company based on the public stock price or as of -- again, as of the close of market yesterday, is about $971 million.

In terms of Q1 financial highlights, revenues were $7.15 million. Net income was a negative $2 million, on an earnings per share basis we had negative $0.10, based on basic weighted average common shares outstanding of 26.7 million shares. And then Paul already discussed the NOI of $5.3 million and I will in later slide also address some kind of onetime elements that affected NOI for this quarter. And then jumping down, AFFO per share was $0.01, based on about 33.2 million shares on a weighted average basis, which includes also OP units. Dividends declared for the quarter were $12.75 per share with a record date of June 30, 2017 and a payment date of July 14, 2017.

I will now turn to the following page, Page 6, to specifically discuss debt outstanding. During the first quarter, we added about $55.5 million in term loans with MetLife. And also, as a result of the AFCO acquisition, we acquired some debt with the acquisition for a total of $90 million. At the closing of that acquisition, we also added a new line of credit with the AFCO's existing lender, Rutledge, for a total of $30 million, of which $2.4 million were actually drawn during the first quarter. So we currently now have $27.6 million. I should say as of the end of the quarter, we had $27.6 million in undrawn availability under that line.

During the quarter, we also converted from LIBOR-based floating to 3-year fixed rates, about $106 million of facilities with MetLife. Our weighted average interest rates is 2.92%. The weighted average maturity, meaning the -- our refinancing kind of term is 5.8 years, but the -- our average interest rate exposure is about 1.9 years.

Our loan-to-value kind of overall as a net debt over total assets is 44.3%, and after the conversion from float to fixed, we are at about 78% of our debt is on fixed rates, ranging from 3 to 10 years.

Switching now to Page 7. The top of the page is really a breakdown of total GAAP expenses. I will call -- I will draw your attention to a couple of elements: One, first depreciation and depletion of about $1.5 million as compared to $317,000 in the same quarter of 2016. The jump -- the significant jump is due to the fact that not only we've grown the company and we've also done some improvements, which are largely depreciable assets to some of the existing farms. But more importantly, with the addition of the AFCO acquisition, and the addition of permanent crops, the depreciation and depletion in our balance sheet significantly increases. On the property operating expense side, $1.8 million this quarter as compared to $440,000 the same quarter last year. One big element of that $1.8 million is a onetime nonrecurring expense of about $700,000 that is related to the Prudential management fees as well as simply the fact that we had a much larger portfolio. The vast majority of our property operating expenses are really property taxes. And therefore, we have no control of that component.

Going to the bottom side of the page. This is a kind of -- we look at the reported GAAP expenses and there are a couple of, as I said, nonrecurring items that I wanted to draw your attention to. One is the approximately $700,000 of Prudential management fees. As you probably know, that contract has been completely discontinued. So there is going to be no Prudential management fees from Q2 going forward. And also, we had about $628,000 in other acquisitions and diligence costs. Vast majority of that $515,000 were show up on our P&L as acquisition and diligence costs, the balance about $113,000 are in the legal and accounting bucket. Specifically, once you look back at the net operating income for the quarter, and since we defined it as total reported revenue minus property operating expenses, you really have to think about the fact that there is $700,000 in those property operating expenses that are not a recurring item.

And with that, I will turn the presentation back to Paul.

Thank you, Luca. So turning on to Page 8. The -- and this is just a quick overview of our total portfolio. What this really represents is that we have achieved, as I said earlier, the diversification and scale that is really important to connecting an investor to that global food demand story in the face of land scarcity. So when you look at the portfolio today, what's important to note is, we began our life as a REIT, and largely a Midwest Corn Belt portfolio. And we have very successfully branched out from that. Still, most of the investment we have in the central part of the country is connected to the primary commodity crops, corns, soybeans, wheat, rice, et cetera. But the crops that we own on our land, on both the West Coast and in Florida, largely are unrelated to that -- to those primary crops, and include on the next page we'll -- then we'll talk about what those crops are, but generally, are crops that do not trade in lockstep with the commodities. This has provided a substantial amount of diversification in terms of rental revenue and where that rental revenue comes from, fundamentally. And also whether the tenants on those farms are under any sort of pressure due to commodity prices. And essentially, the farmers on the West Coast are completely out of that general up-and-down cycle.

Turning to the next page, we have on Page 9, is that the portfolio today is around 24% permanent and specialty crops, meaning the tree nuts, the citrus, the vegetables, et cetera, and about 76% row crops. That's on an asset -- a dollar value of the assets basis. If you look at kind of aggregate U.S. crop value according to the USDA, you would see about 22% is permanent, and specialty crops and row crops is about 78%. That's really the portfolio construction that we want. You may see us gradually add a bit more specialty as a percentage of our portfolio. Our perspective on that is as long as we can add specialty crops and increase total cap rate in the portfolio, but not add overall portfolio volatility. We will try to do that, it's really sort of discovering that efficient frontier, if you will, where you can continue to add somewhat higher risk assets to the portfolio, but get overall portfolio volatility, frankly, down.

So we may see some modest increases, but we're still largely committed to running a portfolio that is -- that is balanced appropriately between primary row crop and specialty crop. The right side of the page, it does amplify that the number of -- frankly, the incredible number of different crops grown on our land. On the specialty side, not only are those crops noncorrelated with primary row crops, they're, frankly, not correlated in terms of price with each other. That gives us an immense about of diversity and stability in the cash flows of our rental stream. We have about 110 separate tenants across the 154 acres, which has gone a long, long way to lessen any significant impact and concentration of any given tenant.

With that, I think, I'll turn it back over to the operator, Chris, and we'll open it up for questions. Thank you.

(Operator Instructions) Our first question is from Dave Rodgers of Baird.

I wanted to kind of maybe ask a couple of questions about revenues and the directionality. You recorded about $7 million in the quarter on a GAAP basis, but you said you collected about $17 million. Can you talk about kind of the remaining cash rents that you'll receive as the year progresses, assuming no additional acquisitions? And then maybe guide us to where Q2 GAAP revenues going to come out as the year progresses as well?

Yes. As you know, we're -- we don't actually issue guidance on a quarter-by-quarter basis by any means, I don't think we've actually ever issued guidance below the revenue line at all. What -- I would actually, Dave, like you to do that calculation yourself, but what we tried to give you is the building blocks to think about that in that 1 page where I built the revenue from the GAAP number of $7.15 million up to $9.6 million. So when you think about what GAAP revenue would be into -- in the second quarter, you obviously do not add those lease termination payments. I mean, those -- we did already collect that money, it's not going to flow through the GAAP revenue. We put it out there as a factual example of what's going on, but you certainly shouldn't include that. Most of the rest of those numbers though, you'll actually start to see come through in our GAAP revenues as you move forward. Obviously, we continue to make acquisitions. And obviously, any acquisition that we made post quarter end will also add a little bit to the revenue. And then ultimately in the fourth quarter of the year, we collect quite a bit of crop share revenue for the portion of our portfolio where we have some kind of participation, either as a bonus or as a direct crop share. On that point, an added note is that the specialty crops tend to have crop share coming in all through the year. It's not all in the fourth quarter because the harvest cycles are different and spread out through the year. So I think, we've given you kind of enough information. You can kind of build up to a revenue number that's hopefully somewhat accurate. I don't think I want to go really any farther than that at this point.

Does the GAAP revenue you reported reflect your estimates of what you anticipate receiving from a crop share perspective throughout the remainder of the year?

Yes. So what -- yes and no. So let me explain how we do that. So -- and there is a lot of detail in the Q on this if you want to go look at it and then if you need to, feel free to call the company and we'll help you understand it. What we do is we take the crop insurance minimums that are available to our farmers and we will straight-line that crop insurance minimum revenue through the year. We -- that is usually in the neighborhood of 70-ish percent or 75% maybe of expected total revenue under reasonable assumptions of price and yield volume. But that's what we include in the sort of ongoing straight-line financials during the first 3 quarters of the year. We do not -- we don't -- anything above the crop insurance minimum we wait until we actually receive the cash, which is why you see that fourth quarter bump of some amount every year.

And that last comment you made is specifically related to crop share revenue?

Yes. Yes, it's specifically related to crop share revenue. We project -- yes, so if we collect the cash -- if we collect $100 for a given acre, $100, we take $25 a quarter through the P&L on a straight-line basis. If we -- if it is a crop share lease, okay? Then we will take the crop insurance minimum, which is really kind of the floor amount that we will collect. When I say the crop insurance minimum, it'd be our percentage of that crop insurance minimum that we will get even if a farmer has a bad crop year. But we don't take any more than that because we certainly don't want to over report revenue through the quarter -- through each quarter during the year.

All right. Thanks for indulging that, Paul. And maybe moving on, can you talk about what's your acquisition pipeline is looking like, today you closed almost $100 million of additional acquisitions in the quarter. How healthy is that backlog? And what types of changes that you've seen in pricing?

Yes, the backlog is incredibly healthy. We have a really strong pipeline. Our challenge, frankly, is that we're close to fully invested in terms of the cash we have on the balance sheet. We, at this point, are working hard to do deals on an OP unit basis. We are likely to grow somewhat less this year than we, frankly, would've hoped because -- we frankly, expected substantial stock price appreciation based on the AFCO acquisition and the termination of Prudential. And all of that, frankly, none of which we got. And so we're frankly, pretty disciplined in terms of trying to grow creatively without causing unnecessary dilution to the company. So we've got plenty of pipeline. We're -- frankly, capital constrained is really the issue. In terms of what we're seeing in pricing, we're getting a modest decrease in valuation on some of the properties, obviously, that's happening a little bit in the Corn Belt, we're having opportunities to buy assets less expensively than we would have been able to buy them a year or 2 ago, but it's not very significant. I mean there is -- there isn't a substantial amount of cash still in the farmers’ hands, in particular, who are the primary buyers of land and those guys still compete aggressively for farm land. You occasionally still see new records being set in the Midwest for land values and given new county records or new state-wide records of farm land values, those are anecdotal one-offs. Our general sense as I've expressed in the past, is that you're seeing modest decline in Midwest Farmland asset values, but it's frankly very modest, measured in couple percent -- percentage points, maybe 3 at the most. So that's kind of the state of affairs out there. On the rental side, obviously, you're seeing rents come down temporarily to some degree. We're getting slightly better cap rates on new acquisitions than we had been getting historically, but the absolute dollar amounts of those rents are coming down a little bit. So that's the kind of balance of what we're seeing. Wish we had more capital to invest, we think there's -- again, given the long-term trends, we think there are – there’s incredible opportunity out there. And the prices of asset values, rents and demand are -- will continue to be strong and the long-term -- long-term story, as I said earlier, is completely intact. But we're public company, we got to manage our capital allocation and our stock price to some degree.

The next question is from Rob Stevenson of -- my apologies, from Jessica Levi-Ribner of FBR.

Just looking back at the nonrecurring expenses, when you mentioned the depreciation and depletion of roughly $1.5 million, is that a good run rate for us to use on a go-forward?

Luca, you want to address that question, please?

Yes, absolutely. Well, you have to think that being the large chunk of that depreciation and depletion increase coming from AFCO and we only owned AFCO for part of the quarter. With that one caveat, I would say that yes, this is a good run rate.

Okay. So maybe it would be just a little bit higher?

Correct.

The other question I have is -- so again, on the property operating expenses, less the $700,000 of Prudential management fees, we can think about that as maybe a $1.1 million. Again, grossing it up a little bit for the AFCO for 2 months of lost AFCO kind of expenses?

Correct, yes.

Okay. And then just in terms of your outlook for crop prices going forward, commodity prices obviously there have been some significant headwinds. How do you think about that maybe even in the next year or so? And obviously, your long-term thesis with global food demand and supply, but just maybe how we can think better the next year?

Yes. Well, so predicting commodity prices for the next year is -- it's incredibly difficult. So to me it's a hard thing to do. I think, but so – but let me -- because it's driven by some relatively -- fundamentally, it's driven by the weather. And so that's good luck with that. But let me give you a way to at least think about it, and I think every investor needs to think about it. Now our perspective is, just so you understand how I run the company, we run the company under the following assumptions. That'll hit long-term historical trends of increasing demand for most food stuffs and certainly, increasing demand for a diverse pool of food stuffs like we produce on our land, that is almost unchangeable. That is at this point a multi-decades trend. No reason to think that there is anything out there that changes those fundamental long-term demand characteristics. Population growth, GDP per capita, you name it, they're all still pushing in the same direction. If you pull stats on soybean demand, on corn demand, on a worldwide basis, these numbers are incredibly positive and incredibly strong long-term growth trajectories. People get all worried about what the U.S. market share might be. That's a -- it's just kind of a nonissue. The U.S. is still a top 2 or 3 producer of all primary commodities, frankly. It doesn't matter if the total size of the pie is growing, our slice of that pie is growing. And it's kind of horse race statistics that don't make much difference, whether Brazil is #1 or we're #1 in total volume, what's important is that the total volumes for both Brazil and the United States continue to climb up based on the incredible demand. Land scarcity is set in stone. I mean, there is -- I recently gave a speech in New York where we talked about in the last 50 years, U.S. farm land in production is down 19%. If you look forward, in the next 20 to 30 years, worldwide farm land production -- land in production is off in the neighborhood of 2% or 3%. You just have reached the point that we need to feed the world with ever increasing productivity on the land we have. That's going to drive long-term values. Now going back to your -- and that's how we invest. I mean, I'm not -- I can't guess -- I mean, I'd create commodities for a living instead of buy farmland for a living if I could guess what prices were next week or next year on commodities. But here's what it will take to bring commodity -- what we're experiencing is a temporary decline in commodity price due to substantial volume of production a couple of years in a row due to frankly, very good weather. What will change that is a weather -- a negative weather issue in some important production region in the world, whether that's the U.S., the Ukraine/Eastern Europe, former Soviet Union region or South America, Brazil and Argentina, in particular. I mean, those are the 3 big bread baskets, if you will, of the world. If we have a negative weather event or a really negative political event, frankly, in any of those countries, that will decreases production. You will see price of the primary commodities jump dramatically. A few days ago, or after there was a big blizzard across the Midwest and the plains, you saw a real jump in commodity prices that, of course, backed off, but what that indicates to you is -- to a careful observer, is what it indicates is just kind of how close to the edge on the worldwide supply-demand statistics we are. On the main crops, corn, in particular, we have a very large carryout and you can see this in the USDA statistics. It will take a -- it will take one troublesome production year frankly, though to burn through that carryout and put us back in a substantially higher price position. But -- again, I've said this in many calls in the past, the price of the crops within reason is just -- it's one factor, but not by any means, the only factor. For most farmers, you've seen productivity increases continue to move up, meaning they're producing more crop -- higher yields on their land, they're producing it with less total investment in input. One of the things, for example, going on out in the field is the use of high-speed planters, which increases the number of acres that a given human being can plant in a day. And so you've seen all this kind of productivity increases occur that increase profitability for the farmers. You've seen the input costs for many of the inputs come down, whether it's the key fertilizers or equipment or seed. And so your situation in farm country is frankly, kind of stabilized in my view from where it was as long as we see commodity prices not go lower from here. I think that we're in a pretty good position. And we'll see -- at some point, there will be a negative weather event, which is going to take these carryout’s away.

And actually to build a little bit on that point, you have to think of the weather pattern that we've had over the 2 or 3 years of kind of nearly perfect weather pretty much everywhere in the world as the statistical outlier. Typical growing year, growing season always have some sort of imperfect weather somewhere.

(Operator Instructions) Our next question is from Rob Stevenson of Janney.

Paul, what was the cap rate on the almost $100 million of acquisition you guys did in the first quarter? And then, what is it looking like for the stuff that's you currently have under contract?

Yes. So, I mean, cap rates, we don't release exact cap rates on individual transactions, but I'll give you context. Our specialty crop, cap rates are generally running in the 6% to 8% bracket, meaning tree nuts, fruits, vegetables. There is some variation around that, but that would capture the overwhelming bulk of them. If you looked at -- if you look at our row crop areas, you're looking at 3.5 to 4.5 cap rates in those markets. And obviously, the 3.5s are the core of the Midwest and the 4.5s will be in the delta in the Southeast. In the Southeast, you occasionally see even into the low 5s on cap rates. And of course, as I always emphasize, think of our business from an economic cap rate, not a nominal cap rate basis because we're not really experiencing, certainly on the row crop farms, any meaningful level of depreciation or depletion. So those cap rates are, while on the headline look low, on a true economic sense, actually given the risk of our portfolio, which is quite low compare pretty well. I hope that helps you out, Rob.

Okay. So I mean, on the $100 million, I mean, is it -- or $98.5 million, what's the sort of -- how should we think about the mix there between specialty and row?

I think you -- Luca, help me out here. But I think that, that pool of acquisitions was probably 75% or a little more row crop acquisitions, and the rest of it was specialty or something in that bracket.

Okay, perfect. And then on that Page 4 on the new release, very helpful, thank you. One question on that though is -- when we take a look at that, how should we be thinking about the contribution in the first quarter from the percentage participating revenues on the crop share stuff? How much of that was -- is in that number in the first quarter? How should we be thinking about that going forward?

Yes, I don't -- Luca, you may have some more precise numbers that we have in the public domain, but I don't know precise numbers, but I'll give you context. You will have in the first quarter of any given year in our business, some participating revenue amounts, and here is where they come from. So the big quarter for participating rents, if you will, is the fourth quarter and it will probably always be so. But you will have a certain -- if we have not marketed a crop that -- and we don't market it, the farmer, if the farmer has not fully marketed and disposed of the crop, when we get to December 31, and that always occurs to some degree, you will actually see those revenues in the first quarter of the next year, not in the fourth quarter of the prior year because unless we have certainty, we don't book -- we don't -- they're under contract, but still in a bin we'll show the revenue, but if they're not under contract at a set price, we don't really show the revenue. So you'll always have a bit of a tail. This shows up more likely in things like cotton and rice than in corn and soybeans and it has to do with the harvest times and how close to the end of the year and what the marketing cycle is for those commodities. You will also see some of the specialty crops because they are harvested at very different times through the year. You'll see some specialty crop revenue that is crop share or participating in nature show up in the first quarter. I don't know the exact number that's in there, Luca, if we have it in the public domain feel free to share it, but I don't know it off top of my head, but they'll be some of that in there.

No, we don't have it in public domain.

Okay. So -- but it sounded like when you were talking about the insurance stuff, the way to think about this is, roughly, if you're straight lining basically 70% to 75% of the revenues that you expect to get over the year, that it looks like 18% or so of the crop share hits in each of the first 3 quarters, and then 46% or rough numbers thereabouts hits in the fourth quarter. And just trying to figure out: a, if that's the right math or thereabouts? And then, b, what's sort of -- in that sort of run rate from a straight lining perspective?

Yes, I'm trying to think about your math for a second, Rob, and I -- on that particular question, just call the company after the call, we'll try to help you think about it. I'm not sure that's the right -- you said 18% each of the first 3 and then 46%, explain that again, if you don't mind? Let's see if I can help you ...

So if you take 70%, roughly, 70% to 75% is roughly, 18%. If you divide that by --

I got it. Now, I understand you. Yes, I understand. Yes, I think that's a pretty good way to think about it. But let me give you a couple of caveats, and I apologize for the complexity, but it's just the reality of our business. And unfortunately, GAAP treats us like we're an apartment and we rent everything by a month, and it just doesn't line up very well with our business. But here is the -- here is the kind of things you have to think about. So we've got straight cash rents, those are easy, they're just straight line through the year. Then we have participating rents that have a major minimum amount of cash collected and we have quite a few rents that way. If the minimum cash collected is higher than that approximate 70% of crop insurance proceeds potential, we actually are straight lining the minimum cash. Now if the crop insurance is higher than the minimum cash, we’re straight lining the crop insurance. But we -- you've got that, and then you've got true crop share where we are mostly, if not entirely, based on actual revenue production in a farm, and that's where we're taking the 70% through. I think the best I can -- I mean, I know what you're trying to accomplish and we appreciate it. It's just a challenge for us in the nature of how GAAP treats us, that's why you're seeing us with the supplementals start to kind of hopefully build you a roadmap based on several quarters that you can use to create some metrics that you can -- you can project forward more accurately. So -- but I think -- I mean, you're roughly thinking about it correctly, but remember, it's not just cash or crop share, there's that group in the middle where we have a minimum cash collection, which we tend to like, by the way. If we're going to do crop share, I'd rather do it with some minimum cash collection when we can, because it just lessens our risk.

Okay. And then the acquisition cost for one-off acquisitions are being capitalized at this point, is that true?

Luca, I'll turn that over to you.

Yes, the -- especially with the change in the way to treat acquisitions, we are going forward, you're going to have all asset acquisitions and that will allow us to capitalize costs, yes.

Okay. So the only thing that should be running through the acquisition cost line item on the income statement would wind up being abandoned pursuit cost or some corporate level transaction like AFCO, again?

Correct. Because -- well, even AFCO, probably would have -- actually would have been treated as an asset acquisition most likely under the new standard, we just -- just the timing didn't work out of the adoption of the standard.

Next question is from Mitch Fitter of Aegis Capital.

Real quickly, on prior calls you talked about book value. Is -- would you like to comment on the book value of the company?

Yes, I don't know if we've talked about it much in prior calls, but Luca, you want to address it, it's on your slide, the asset value of the company?

Yes. Fundamentally, the way we think about the asset values of the company with the -- as far as book values are concerned, the only major divergence between book value and anywhere close to a real value is the legacy assets that we had at the time of the IPO 3 years ago, which for accounting reasons, we couldn't mark-to-market. And the gap between book value and anywhere close to real market values at the time was about $33 million.

So if you -- so in other words, if you look at our balance sheet and you see as of March 31, approximately $971 million total assets. You basically add 30-ish to that and you'll get a rough sense of the value of the total assets. We haven't own most of our farms. We'll see slight variations in -- up and down over the last couple of years. But so many of the farms that we've acquired have been acquired in the last 12 to 24 months. They're frankly, awfully close in value one way or the other than what we paid for. I think it's -- farm land does not go up or down incredibly rapidly either direction. So we're going to be pretty close to what we actually paid for these properties with the adjustment that Luca just mentioned.

Next question is from Randy Swenson of GVC Capital.

I just have a certain question, I'm trying to put some perspective around your Slide 4 and to understand the accounting a little bit. Is -- are all of these adjustments zero-sum gains? And what I mean by that is when I look at -- let's pick effective Q1 leases signed for the quarter, and you want $63 million of additional revenue in this quarter. Are there -- because of the way the GAAP is straight lining, is there a compensatory reduction in future -- in next year, in 2018, that you're not collecting the cash in the first quarter of next year? And therefore, there should be a compensatory reduction in this amount and similarly...

Yes, not really. Let me describe what happens and you can --

So cash really goes away -- cash really goes away.

Yes, let me draw the conclusions for -- let me tell -- you draw your own conclusions, I'll tell you what's happening though. So looking at Page 4, couple of different things are moving around. Okay. So -- and let's be kind of crystal clear about it, so on the lease termination group, that's the item to the far right, 620. That cash, we already collected. That got put -- that's that big slug of cash we got of about $6.5 million in termination fees in the fourth quarter. So that's not going to keep start coming through in the future. That in fact, we already collected. I put it in here because we've got equity analyst and some of you in your own funds run in models, I'm trying to help you think about, do you have your modeling wrong or did you just miss on kind of how timing worked, and that's what we do this quarter. So that's one thing. Then go to the other end. The $510,000, which is effective AFCO acquisition closing. An unusual sort of impact of how GAAP works, that revenue is kind of "trapped" from a GAAP perspective inside AFCO's stub year books for 1 month of 2017 that we didn't own it. That cash, while we actually got the cash at the closing is never going to show up in any revenue anywhere. So I'm just -- so look at that. Now the 2 groups in the middle. When we acquire a farm, if we acquire a farm on -- you just pick a date, on March 1, and we acquire -- let me actually make it even more extreme for you. We acquire a farm on March 25 and this actually happened this quarter. You close it on March 25. You have agreed that the rent for the 2017 crop season is $100,000. We only get to take in this quarter 5 days’ worth of that $100,000 under GAAP.

Yes.

They straight-line the entire -- so let's say it was a 3-year lease, $100,000 a year. GAAP requires us to straight-line the entire $300,000 through the full term of the lease, which is measured clear till the end of 2019, for example. So what is happening is you are going to take less revenue in the '17 calendar year than you actually in a true cash sense, in a business sense we're getting for that year. But you are taking slightly higher revenue in each of '18 and '19 than you really in true economic sense got for those years. You understand what the mathematical effect of that is. I don't -- I'm not sure how to draw the answer to the question you actually asked but those are kind of the facts of what's happening. That same example also occurs if we have a lease expire on December 1 and don't – on the row crops in the Midwest and don't actually re-lease it till January 30. That's not by any means -- I've been doing this a long time, that's not got anything to do with having a hard time re-leasing it. It's that in the real world, farmers and farm managers aren't freaking out about a "unleased" farm when there's snow on the ground. They're just -- they're finding a new tenant and getting the lease put in place. But the way GAAP pretends, we didn't get paid for those 2 months. In fact, we did get paid for those 2 months. But that's just what we're up against and obviously, we have to follow the GAAP rules, so we do.

You answered the question. So in the cases of the leases, the lease timing issues, there's -- it is a zero-sum gain and any -- and there should be a compensatory adjustment.

Yes, I think, the way -- I don't if I’d truly called it zero-sum game. But here is how I at least think about it. You really got to think about our -- in an agriculture business, quarterly -- quarterly financials are a little bit challenging because it's -- the entire industry is an annual cycle industry. And when you -- by the time you get to year -- 2 things occur, as we get to the end of the year, a lot of the noise that I just described is washed out although not entirely. But as the portion of our portfolio and I alluded to this in my prepared comments, as the portion of our portfolio that we have owned for more than 1 year gets higher and higher and higher. The impact of these GAAP kind of imposed errors, if you will, go away or at least gets substantially lessened because there are small -- most of these issues no longer exist once you've owned a property for more than a year. Because you kind of cleaned -- you've got GAAP and actuals more or less on top of each other.

If you do 1-year leases you'll have quarterly problems, if you do a leases as you said on the 31st of March, and you have to straight line that revenue over the rest of the year, you basically take the whole year's revenue over 9 months and you don't get any credit in the fourth...

Yes, and that's -- and that to be honest is frankly, misleading the other direction because what you're doing is you're juicing up revenue in the 3 quarters.

Yes, exactly. But you don't have...

And that's not fair -- yes, that's not fair either. What we're trying to do is to get all of you folks on The Street so to speak, the best possible understanding of what's really happening underlying. I apologize, that it's messy, but like I said, we have to abide by GAAP. So we do.

Gentlemen, we have no further questions in the queue at the moment. Would you like to make closing comments?

Sure. Thank you all for joining the call today. We appreciate your interest in our company. We are, of course, always honored that you continue to be shareholders and look forward to helping you think through the performance of the company. If you have any follow-up questions, feel free to reach out to us at the company. Thank you very much.

Thank you very much. Ladies and gentlemen, this call is now concluded. And thank you for attending today's presentation. You may now disconnect your lines.