Farmland Partners Inc (FPI) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Farmland Partners Inc. Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

Thank you very much, Drew. Good morning, and welcome to the Second Quarter 2017 Earnings Conference Call and Webcast for Farmland Partners.

We truly appreciate your taking the time to join us for these calls. We see them as a very important opportunity to share with you our thinking and 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 2Q 2017 supplemental package, which we will be speaking to later.

The link for the presentation is directly below the webcast link and is also posted under the Presentations section of the Investor Relations portion of our website.

With me this morning is Luca Fabbri, the company's Chief Financial Officer; and David Ronco, the Vice President of Capital Markets.

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 August 3, 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, July 20, 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 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 first quarter -- second 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 July 20, 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 have filed 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. This is obviously a very good quarter, a relatively normal quarter. It's materially more indicative of the long-term capability and success of the assets we have put together than the first quarter was. Both revenue and AFFO are representative of what we believe this company can do. But I want to make a note of caution, every quarter will be slightly different. We are reducing what is fundamentally an annual business to a quarterly set of financial results that invariably has some noise in it.

Revenue of $11.5 million is 90% above the 2016 similar quarter. What that really demonstrates is the power of the American Farmland Company acquisition and adding those assets to our portfolio. It is also, obviously, way better than the first quarter, both in AFFO and revenue. The first quarter, as we all know, was very affected by one-time events related to the merger. AFFO of $0.10 a share is a 51% increase year-over-year. We are quite happy with that number.

Adjusted EBITDA of $8.1 million, that is double of that of the same period last year. I want to apologize for everybody for the confusion and frankly, the scare it put into all of you based on our first quarter results. Those results, though, are a function of GAAP accounting for other types of REITs not mapping to the actual economics of Farmland ownership. But we must comply with those rules when we report our financials. So it fundamentally is what it is. We reiterate our AFFO guidance for 2017 with a midpoint of $0.35 a share.

For more information on this, you can see Page 15 of the supplement. Because of the merger GAAP and timing noise in the first quarter, essentially, our AFFO guidance is missing 1 quarter of AFFO. This quarter, while good, should not really come as a surprise. If we reported $0.01 of AFFO in the first quarter and we have projected $0.35 for the entire year, you can divide that remaining $0.34 by 3, and have a rough indication of the amount of AFFO we will have per quarter. However, as we all know, the fourth quarter tends to be the biggest of those quarters.

I now want to make a couple of comments about land values versus near-term rental outlook, and what the effect of that is on cap rate. The reason for this discussion comes from several questions I've gotten from investors.

Fundamentally, land values have remained quite stable. They have not declined very much, even in the regions of the United States where grain -- the primary grains are the driver of those farmland markets. The reason for that, as I've said many times before, is farmland is a very long-term asset. It fundamentally is valued based on the long-term outlook of global food demand and land scarcity. Nothing in terms of that long-term outlook has really changed. Therefore, farmers and other buyers of farmland are paying nearly, although not completely, the same prices they would have paid several years ago for row crop farmland. Rents, on the other hand, are more of a medium-term asset. They reflect a farmer's view of the revenue potential on that piece of land in the near to medium term, meaning 1 to 5 years.

Obviously, the revenue potential of those farms has declined in this commodity price environment, and we have seen some impact of that in terms of our rents, when we roll over 2014 leases, in particular. So land is very long-term, very stable, hasn't changed very much in value. Rents, on the other hand, have declined somewhat more sharply.

Cap rates are really just a function of the first 2 things I said. What we have seen is cap rate compression, but cap rate is not the driver. Land values have been sticky, revenues have come down, so the simple math is that cap rates have come down. If you look on Page 16 of the supplement, we have reduced the cap rate in a -- in 2 different regions that we are seeing in the marketplace, and that reduction is -- comes in the Corn Belt and in the Delta. What that comes from is we're active in the marketplace, there are numerous transactions going on in the marketplace, and we are seeing properties trade at relatively low cap rates. That is not because the market has decided the cap rate on farmland forever is at that number. It's because the market is saying, "Land value is still sticky, still basically the same as it was, but rents are temporarily depressed in this commodity environment," and that's fundamentally what is causing those cap rates in the marketplace to come down.

If you look at -- we've added a new page to the supplement that was not there last quarter, called Cropland Value and Appreciation. If you turn to that page, which is Page 17 of the supplement, what we've put on this page is USDA data from the land values survey that the USDA produces. We've put both the national number for the last 10 years, in terms of farmland value, and we have put the numbers for each state in which we own farmland.

I think it's important that investors in our stock see and understand the context of farmland value through time, and the impacts of various changes in the overall economy or in the ag economy on that farmland. Couple of things to point out, of course, that, that you are starting to see a modest dip in the national value of farmland between, sort of, 2015 was the high, 2016 is modestly, but very modestly lower. We anticipate, when this report comes out in August, you will probably see, on a national basis, another modest decline. But again, quite modest.

The reason for that, is that while the core of the grain belt is struggling from an ag economy perspective, most of the rest of the country is still showing positive gains to farmland asset values. Couple of things, if you look at the indexed portion of this chart in particular, you will see some sort of slightly negative land values over the 10-year period on an indexed basis or even -- or very, very low appreciation rates in terms of the 10-year CAGR. What you're seeing, all of those states where that has occurred are in the Southeast, that's Florida, Georgia, the Carolinas and Virginia. What's really going on there is the peak in those markets of "farmland" was in 2007 and 2008. It's fundamentally noise from the real estate bubble showing up in the farmland statistics, and the reason is the absolute amount of farmland in those states as a percentage of total land, and therefore, the impact of the real estate bubble is more magnified. So your sort of hardcore ag states don't seem to show that effect. But if you look at those index numbers and you get confused about, "Oh my God, why does Florida look down?" It's really not what's happening to ag-specific properties. There's a lot of noise there from the overwhelming development pressure in that region of the country.

Moving on to rents, as we currently see them, historic roll downs, and sort of our outlook for the future. So in terms of the -- I think that there's been some misinterpretation of what we are seeing in the marketplace in terms of rent roll-downs. We experienced 3 separate buckets of rent roll-downs in the first quarter. And that -- this has all been discussed before, but I want to try it one more time and see if we can clear up the confusion. The -- they came in 3 different regions of the country: Illinois, Colorado and the Southeast. So let's start with Illinois and Colorado.

We experienced approximately a 15% reduction in rents in a small portion of the Illinois portfolio that was where the leases were originally negotiated at the top of the market in 2014.

Those -- what occurs as a very practical matter is, cash rents, high cash rents from '14, when you renegotiate them in a more difficult commodity price environment, by definition, you shift that lease to something with a minimum base rent in cash and a bonus if and when you see commodity price recovery. That's what we did. You are seeing the effect. That 15% reduction will recover quite quickly under our lease structures if we see commodity price recovery.

When I say quite quickly, that is not in a quarter, that is over 1 year or 1.5 years, that we'll have the roll-through effect on those leases.

Colorado, similar situation. We had 2014-era leases, again, a very small percentage of the overall portfolio. But we had 2014 leases rolling over in a more difficult commodity environment. Obviously, Colorado is hit even harder than a place like Illinois. That has to do with basis compared to Chicago Board of Trade, and you saw rent reductions in the neighborhood of 25% on those leases. Those leases, again, are shifted to primarily crop share-style leases in the bottom of the market, like we are in right now, and will recover incredibly rapidly if we see commodity price improvement.

The Southeastern United States is a very different situation, and I'm going to spend just a few more moments on this. We had a major farmer in the Southeast, for their own personal reasons, decide to discontinue farming, a substantial amount of their operation, had to do with their overall business organization. This family is in many different assets, not just agriculture. When they terminated those leases in, essentially, Christmastime of 2016, we went out and re-rented that land in about 30 days to other farmers, because it's the Southeastern United States, so you're right up against planting deadlines in early 2017. Meaning, those farms get planted in essentially February or early March. So we re-rented those lands at a -- the rents we have on those lands are approximately 30% lower than the rents we had under the previous tenant. However, and this is an incredibly important however, on an economic basis, the amount of dollars we collect per acre on those farms actually went up and here is why: When we had originally structured those deals, we had pre-collected 25% of the rents for every year of the lease. Those leases continue for another 2 or 3 years from now, and we were able to extract a termination payment from the farm family that wanted to get out of those leases. So on a true economic basis, we don't know if there will be roll-downs on those farms for another 2 or 3 years. What we did was we re-rented those farms quite quickly to very high-quality farmers, who will make significant, and are making significant improvements in those farms, fundamentally on the dime of the prior farmer who terminated. That is improving our properties, improving our potential long-term returns and maintaining the revenue stream we thought we had when we structured those deals in the first place. Of the overall rent roll-downs we experienced from '14, and remember that 2014 is -- less than $100 million of our total portfolio is from 2014.

The rent roll-downs, over half of them are the situation I described in the Southeast, where we do not in fact have lower per acre economics on those farms. And the long-term outlook for those farms is quite positive.

Turning just briefly to commodity price, now that I've said that some of our leases are affected by commodity price. And again, I've emphasized this many times, commodity price change does not affect us negatively very quickly nor will it affect us instantly when it returns to the positive. But I think context is important. And so I pulled the following facts this morning: If you looked at the December corn contract for December of this year, on January 3 of this year, it was at $3.84. Now it is at $4. That is obviously a significant improvement. If you look at soybeans, they were at $9.83, now they're at $10.24. If you look at wheat, there were at $4.62, now they're at $5.29. If you look at cotton, it's essentially flat. It was at $0.70 a pound essentially -- I'm sorry, $70.37 a pound, now it's at $68.11 a pound. If you look at rice, it was at $10.33 per hundredweight, now it's at $12.03. We are beginning to see significant recovery in commodity price. Can't promise anybody whether that will continue or not, but it is likely to continue and it will have a positive benefit on our future leases and our future rental stream.

We do not expect any further roll-downs of the magnitude we have seen in the past. In fact, we think we will start to see gradual increases in rental rates come back into the market.

Now finally, turning to Page 18. And I want to spend just a minute here. And this is an effort to try to bring together some of the data that we had put out in the past. And again, I apologize if it was confusing, and to get everyone kind of level-set on what we perceive as the realistic performance potential of the company as it exists today, okay?

So -- and I want to caution, this is not changing our guidance. Our AFFO for the year is midpoint, is $0.35, and it is still $0.35. What occurred in the first quarter has occurred, and we are not going to be able to kind of change it and then make those numbers suddenly look better. But if you want to try to think about the 12-month earnings potential of the company, here is a way to think about it.

So if you looked at second quarter AFFO per share and you annualized it, and we are using in this example a range of $0.08 to $0.10. The reason we're doing that is to be a little cautious and conservative. So $0.08 to $0.10 leads you to $0.32 to $0.40 of AFFO per share, just multiplying that run rate by 4. As I explained, the lease terminations in the -- the lease terminations that we had, where the revenue was booked under GAAP in the fourth quarter of '16, if you'll -- but where we as a practical economic matter are getting those monies attached to the land that we currently own and are currently renting, that is worth approximately $0.06 to $0.08 a share on an annualized basis.

And then if you look at the fact that the fourth quarter is always the strongest quarter for us due to crop share contribution, we estimate a range of $0.03 to $0.05 of incremental value-add from crop shares in the fourth quarter. It leads you to a total per share on a 12-month run-rate basis of $0.41 to $0.53. This, of course, does not take into account, as I said a moment ago, this is based on the facts that we have today. It's based on the economic situation, the interest rate situation that we face today. But I think it does give a better example, and a clearer example, of the performance potential of the company.

As I said, future crop price increase or decrease, interest rate increase or decrease, incremental changes in our debt or equity capital or changes in SG&A would throw this off, but it gives a baseline for analysts and investors to work from and think about. I said it earlier, but I do want to say it again: Guidance for the year on AFFO is still a midpoint of $0.35. That's what you will see, as you report -- as we report through the rest of the year.

With that, I'm going to turn it over to Luca to make some additional comments.

Thank you, Paul. As Paul already discussed, the second quarter of 2017 was definitely a lot more indicative of the, kind of, ongoing performance of our company, as prior quarters. Specifically this is the first quarter where we had the full benefit of revenues from the American Farmland Company acquisition. While we did not have the, kind of, the noise associated with such a large transaction, we did not have any of the legacy costs that wouldn't carry over into our structure, such as the Prudential Management Agreement.

So revenues for the second quarter were $11.5 million, which is almost double the revenue that we had in the same period a year ago.

Net income was $2 million, an increase of 53%, and net income available to common shareholders was $0.02 a share as opposed to 0 in the same period of last year.

Again, as I said earlier, I'll refer you to the press release and to the supplemental for all the appropriate definitions and disclosures around non-GAAP measures, including FFO and AFFO and how we calculate it and how we define it. Having said that, the AFFO for the second quarter was $8.1 million in -- on a per share basis was $0.10, which is a 51% increase year-over-year, and of course, as opposed to the $0.01 that we had in the first quarter.

We calculate our fully diluted average shares for the purpose of this calculation, the AFFO per share calculation, by including common OP units, but excluding preferred OP units. And specifically for the second quarter and fundamentally, as of today, we have 39.2 million fully diluted average shares outstanding.

This concludes my remarks on our operating performance for the second quarter of 2017. Thank you for your time this morning and your interest in Farmland Partners.

Drew, we would like to begin the questions-and-answer session.

(Operator Instructions) The first question comes from Rob Stevenson of Janney.

Paul, given your comments about -- you had these couple of big lease roll-downs. How should we be thinking about the remainder of '17 and even into '18 in terms of these leases that come up for renewals then? Is this just a modest roll-down? Is it flat, given your commentary? From a big picture standpoint, as we sit today, what do you guys -- how are you guys seeing the marketplace?

What we think we will see, if you look portfolio-wide, '17 moving to '18, is very modest increases in rents, portfolio-wide. Obviously, lots of puts and takes on any given lease within the portfolio, but the reason for that is really quite simple. The potential pain embedded in our portfolio largely resided with leases negotiated in the fall of '13 or during '14, which was still essentially at market highs for the primary commodities. Those leases by definition were usually 3-year leases, rolled off in the last year. So we just don't have '14 vintage leases to any major extent still in the portfolio. That, by itself, means you're starting from a -- shall I say more sensible base on almost all negotiations. Some of the '15 leases that will now roll this year may be a little high, may be a little low, but nothing like the dramatic sorts of things we would have seen '14 to '15. I do want to really kind of emphasize though, that if you look at our portfolio now, $1 billion of assets, that '14 vintage is 10% of the portfolio, kind of roughly at most. That '15 vintage is 25% to 30% of our overall portfolio; '16 and '17 are now half or more of the total portfolio. So you really -- that rent roll pain is all linked to those top-of-market leases back in the '14 in the main, and those are now behind us.

And Rob, to address the part of your question as it relates to the remainder of the year, we effectively have no rent rolls -- rents -- leases rolling over between now and the end of the year. It's all, as you know, effectively an annual schedule.

Right, okay. And second question from me is, how are you guys thinking about sort of dry powder for additional acquisitions, cost of capital and access to capital going forward here? I mean, the stock's having a nice run today, but you guys are still well below where you've done any of your previous equity offerings. Do you look preferred to continue to fund the business? Do you just put a pause on things at this point? How are you guys thinking about that?

So the way we think about it is at this stock price, we're not issuers of common equity. It's, frankly, too dilutive. We own a great deal of farmland worth substantially more than what the stock price would suggest. So we're not going to sell that land, in effect, by issuing equity at these deep discounts. If the stock price recovered substantially, we would change our view on that. That leads us to have to think about other alternatives of financing, whether that is preferred that we can issue in acquisitions or something like that. But the bottom line is, we do hit pause, right? We will not be as acquisitive in this year as we were in the last year, because capital cost is too high. And that's just the reality. The other things that we have thought about and considered is there's some way to do off-balance-sheet sorts of relationships with a large pension fund or other capital provider, where we increase fee revenue based on the quality of the management team we have in place and our ability to source deals, without having to directly apply the capital of this company. So we're sort of thinking of all those choices. But, I mean, you're right. At this stock price, not likely to be an issuer of common equity.

Given where you want to be from a leverage standpoint, how much dry powder for additional acquisition do you have at the moment?

Not -- the short answer is not very much. A tiny amount. Obviously, if you've got a seller who's willing to take a structured preferred security of some sort, that is not dilutive, but it gives us more flexibility. But look, this kind of stock price makes a potential seller of farms to us relatively cautious and pessimistic. So it doesn't -- it's not easy there either.

The next question comes from Jessica Levi-Ribner of FBR.

Just to piggyback on the last question in terms of acquisitions, given -- I think you spoke at length about crop price increases in different regions. With the dry powder that you do have for acquisitions, are you more choosy between geographies and crop types? And how can we think about that?

Well, I think that, as we've always said, we want to maintain an approximate balance of 75%, 25% between the primary row crops and the specialty crops, meaning the vegetables and the permanent crops. We would certainly consider getting a little off of that, something like 65%, 35% maybe in the extreme case. It's really about a combination of where we see the best cap rates and where we see the best long-term value creation opportunity. A very important part of what we do is long-term appreciation, not just current yield. So it's a balance of those things. I think that when you think about our business model and what I just expressed, though, it is somewhat challenging to get deals done in the core of the Corn Belt, given where the -- those properties are trading at today on a cap rate basis, because we do have a dividend to pay, and we do have a company to run, and those numbers just -- even if I like the long-term appreciation opportunity of an asset we see in the core of the Midwest, it's just really hard to make the math work on a current yield basis from a cost of capital perspective. So probably a slight weighting to other regions for that, because of that.

That's understandable. And then just one more from me is, in terms of the leases that you have, the base rate is in cash and then the bonus with commodity price appreciation. Can you give us an idea of how that works? How long do prices have to appreciate and how much? Or does it vary by contract? How can we think about that as we watch commodity prices?

Every lease is going to be different. But to give you a sense, the numbers I read off about primary commodity moves have already led to the very beginnings of bonus rents starting to show up in our model. But again, I want to caution everybody, that can disappear tomorrow with a $0.20 drop in corn price or a $0.20 drop in bean price. So it's very, very sensitive. I mean, this is -- as a landlord, when you get in a position where you're going to renegotiate leases at what you feel like are relatively low points in the cycle, you do a couple different things. You shorten up as much as possible the length of your leases. You don't want to go lock in super-long leases at the low. You add features into your lease that give you automatic upward adjustment, like indexing it off a commodity price or something like that. And we built all those sort of tricks into the leases, and we'll see recovery that comes reasonably fast. But fast is measured mostly in a year, not in a 6-month period of time. Because flip this around for a second and think about it from the farmer's perspective. So for the row crop farmer, there are a couple of really important price dates that he thinks about. The first is what they call the spring guaranteed price under crop insurance. And he builds a budget around that in terms of his working capital and his inputs and everything. Then there is a fall price under crop insurance that is -- that for the farmer's return, because he markets his crops against this, adjusts upward but not downward. So in other words is, to encourage farmers to hedge and sell early, they're locked in at the spring price, and if the fall price is higher, they get an extra payment to have encourage them to take the risk off the table. And then there is the thirdly, his final selling price. When you -- so because of that, a farmer isn't going to say to us, "Okay, if corn price happens to go up for 1 day to a really high price, we're going to let you high tick us in terms of our rent increase due to that high price." So it is muted as it flows through, both up and down.

Just to finish the story though, when you go toward the top of the cycle, which will happen again in our company several years in the future probably, you want to lock in high 100% cash rents as much as possible, because then when commodities start to come down, and if they do, you get to carry on with the high cash rent for another couple of years before feeling the pain of that. And so it's a -- you have a slightly different leasing strategy in terms of the structural leases, low point in the cycle versus high point in the cycle. So these commodity price increases, if they are sustained, will start to show up in rents for next year, in particular; will have a relatively modest impact in rents this year.

And just one clarification. Even though, if commodity prices were such that in our base and bonus leases we wouldn't be eligible for any bonus, that doesn't mean that we don't get any bumps in the fourth quarter in revenue due to crop share to participating leases in general, and that's just due to the kind of relatively wide array of different kind of lease structures that we have in place.

So if we see -- thanks for that, Luca -- and if we see crop price increases, how can we model that kind of in the earnings? Or we can take this offline as well.

Well, I mean, we can talk to you about that offline. But let me -- but for everybody else's benefit, let me give you the high-level answer. We will eventually put out 2018 guidance. We have started to do guidance for a reason, to try to get people kind of focused on what the numbers ought to look like, at least on an annual basis. And we'll help you there with some '18 guidance. We though, are going to wait till late in this year, sometime in the fourth quarter, probably, before we issue that guidance, because I got the same problem you have. And I probably have slightly more experience and knowledge on it, but I basically have to say, "I don't know what the actual price of commodities for '18 is either, yet." I will start to have a better and better view as you get to the end of the crop year. And that's for really simple economic reasons, right? The primary commodities largely trade as a function of what's called carryout, meaning excess inventories. And you've got to get the crop that's currently in the field into the bin to know what your carryout is for '18. And then, given that carryout, there is a range of reasonableness that will get embedded in the market for these primary commodities. And then that starts to show up October, November this year, frankly, when the harvest is well in hand and completed even in some parts of the country. And then you see what '18 looks like and we'll project accordingly. My -- like I said though, my -- it's not all commodity price, it's -- you've gone through in the marketplace, kind of 3 years for the grain farmer that have been reasonably difficult. We've talked in prior phone calls not as difficult as the press makes it look, but reasonably challenged. But it hasn't gotten any worse. So there's a kind of pent-up desire and effort to continue to farm, to expand your farm. We think that starts to show back up in modest rental increases, somewhat unrelated to what's going on with headline commodity price itself. So like I said, I stick with what I said in the call. We think we're going to start to see modest rent increases portfolio-wide.

The next question comes from Richard Schiller of Robert W. Baird.

Thanks for the color on some of these, the crop share revenue adjustments here. I appreciate that the leases that were signed in '14 probably had higher base rents and lower cash bonus-type rental revenue and that has switched for those 3-year lease rolls. But if you were to look at your portfolio today, would you say the majority of your leases have this added bonus? Or are they still at the high cash rent place? And then also, have you guys ever thought about disclosing the -- breaking out rental income by crop share revenue and then also base rents?

So on your first question, the majority, at this point, has adjusted. You're not -- I mean, we've got a lot of cash rent still in place, but we -- but the high-tick '14 rents are largely behind us at this point in time. So we're not going to -- we're not, like I said, I think the words I used is we're not going to see any sort of rent roll-downs of the magnitude we've seen in the past coming in the future, unless the -- unless something fundamentally changes in the ag economy from where it is right now. The second question, we have to be a little careful getting to the exact division of cash rent versus crop share. And here's why it gets really complicated: There is not an absolute bright line in our company between crop share and cash rent. And what I mean by that is I don't actually think we have any rents that are pure crop share.

De minimis.

We may have a couple somewhere probably. But true crop share means, you live or die totally on volume and price on what that farmer grows. We don't do very much of that at all. And then, you get to pure cash, which is easy. You get 100% of the rent in cash. And then the area in the middle is incredibly gray. And the reason is, some things are a minimum cash rent and a relatively big bonus component. Is that a cash rent or a crop share? It's a lot more like a crop share, actually, but it's got a pretty decent cash component. Some of them are pretty big bases, say $250- or $300-an-acre of base and you might have a $50 bonus if things went really well. That's really a cash rent. And so trying to divide those things into just 2 buckets is pretty hard, which is why we don't do it today, and at least in the near term aren't likely to.

(Operator Instructions) The next question comes from [Winston Evans], a private investor.

Several times on these calls, you've expressed your opinion that the market is not valuing the stock or is -- in relation to what the true value is. Could you give us some feel as to what you believe the true value is, like a net asset value per share and how you arrive at that?

Sure. If you went -- so we do try to spell this out for people in the supplemental. So to give everybody a page reference, Page 16 of the supplemental gives a cap rate-based valuation of our portfolio, which you can -- all the facts you need there, you can apply to come up with a number. So that -- and just to complete the thought, if you run that range of assumptions and you run the highs and the lows, you're going to end up with a high $11 to low $12 stock price. The other way to look at it is, what would our land be worth if you called up an auctioneer, sold it -- shut the company down, sold it all off, paid off the debt, distributed the proceeds to equity? Again, if you did that, based on our estimates, estimation of our values for our properties or our, frankly, off our original purchase prices, again, you're going to come up into the mid-to-high 11s, low-12s. That's just kind of the reality. What you should be cautious about doing, because hopefully in the next 6 months to 1 year we'll see this, is that you're going to start to see revenue come back up, in not just my portfolio of farmland, but all farmland. And if people take these reasonably low cap rates we have right now and apply to that increased revenue, you'll think you're going to see a 20% jump in farmland. That's not going to happen either, right? Because, as I said earlier in the call today, the cap rate is really just an output, it's not a driver. And if we see revenue come up, you're going to see cap rates also actually come up a little bit to revert to more historic norm. I looked the other day to -- there's a research report put out by the Illinois Society of Farm Managers and Rural Appraisers. If you want a copy of it, call us, we'll send you a copy. It's a very good document. And what it says in the first paragraph or so of the document is that, "Long-term cap rates in Illinois are between 3% and 4%. But cap rates today are between 2% and 3%." And again, it's just a function that people's vision of the future on the long-term asset, the land itself, has held those prices up, but near-term revenue is suppressed, leading to artificially low cap rates for a short period of time, as well as frankly, artificially low or temporary low revenues for a short period of time, we believe. But that's -- I hope that helps you, gives you a frame of reference. As you can see in the Form 4s, I have been a pretty active buyer of stock this year. We certainly believe in the long-term value, one of the reasons we're kind of frustrated with where the stock price is right now.

And we have a question from Jason Plummer of Midwest Asset Group.

I was hoping you could maybe go a little bit deeper into the situation that occurred in the Southeastern United States with the farmer who had been a tenant farmer and left that business, let's say. I know kind of a rosy scenario was found at the end of that, but if you could go a little bit deeper on that and talk to me maybe about how many acres we're talking? And then also the broader concern of what kind of diligence we have on tenant farmers throughout the entire portfolio, so that scenarios like that don't occur in the future?

Yes, I think the -- so just to bracket the situation, and obviously, we don't disclose the name of any given tenant. This is a very large, very successful family with substantial holdings in various different businesses: Energy, agriculture, lodging. A bunch of different stuff. Basically, as their generations have moved on and so on and so forth, just came to a view that they needed to uncomplicate their own lives, picked a business that they wanted to decrease exposure to and farming was it. And it's really nothing more than that. We had a group of very high-quality interested tenants, albeit on short notice, happy to take on those farms. And as I indicated, we'll end up with, frankly, far more valuable and better assets 1 year or 2 down the road with the new tenants in place. As far as the diligence goes, I actually think the question is misplaced, and here's why. When we do a -- we are not pollyannaish at all. When we do a sale leaseback transaction, which is what this was, they are almost always driven by what this transaction was originally: Death, divorce or distress. It's jokingly, the 3 Ds. No matter what the seller says, if they are an operating farmer selling farmland assets, probably 1 of those 3 things is going on. All 3 of them make their financial picture a little shaky, at least for a few years, as they reorganize themselves either for generational change or divorce or as I said, distress.

So we almost always pre-collect a substantial portion of those rents in advance, because it insulates us in true economic terms from exactly what happened here. Somebody comes into us a couple of years later and says, "I want out." I say, "Great, you can get out. I get to re-rent the property at a pretty steep discount, still come out whole and you move on." But I mean, that is the essence of protecting ourselves and our rental stream, which is in fact -- we have, like I said, because of the excess termination payment, not just the pre-collected rents, we actually have seen the per acre cash coming in on those farms going up, not down. So I mean, I think we're doing the right thing there. Portfolio-wide, most of the time, we're buying from an investor, not a fund like us, but a farm -- a family that left farming several generations ago. So it's really not a sale leaseback transaction. But in the sale leaseback transactions, we protect ourselves in the way I just described. So I think we're, frankly, pretty diligent about it, and I don't see a bunch of issues buried in the portfolio of that ilk anyway.

But actually, while the outcome of the situation from a timing of financial performance is making our life a little bit more difficult because of just lumped up some revenues in 1 period rather than in other periods. From an economic perspective, as Paul was saying, if I could have actually the same identical economic outcome on the entire of our portfolio, I would do that tomorrow, because it was, overall, it was a win.

Sure, sure. I understand that. One quick follow-up to that I guess would be, a couple of times now there has been reference to something along the lines of, "Well, frankly, we think going forward, there'll be more value creation," kind of almost like the new tenants are going to take -- are going to be more productive, are going to do better things, are going to reinvest in the property at a higher rate than the previous folks, which frankly, is a little concerning to me. The second piece, and I fully appreciate what you're saying about hedging, getting money paid upfront, locking in that in case something bad does happen. I fully appreciate that. The lower rental rates that the new tenants are in there for, as you said, substantially lower, are those locked in for any period of time? Or will those be able to be brought back up to market rents in the near future?

So they're basically locked in for the duration of the original set of leases, and after that they'll come back up. So let me -- now I understand your question. Let me help you a little bit more. What I described, the family that exited these properties, I would characterize incredibly, incredibly high-quality properties, but a certain level of benign neglect had begun to set in, as you might expect, given the storyline I just told you about the company having other divisions and some generational change and deciding to exit agriculture. I mean, that's not a decision that gets made in 1 year. So remember, when you have a tenant terminate, you don't -- under the law, that's not an opportunity for a landlord to make a windfall. I mean, if I had gone out and re-leased those properties at exactly the same price I had under the original tenant, I think they probably could have sued me and made me give the money back, give the excess profit back to them, right? It's called the mitigation of your loss concept legally. So our view was, no, let's go find really high-quality tenants. Work out property improvement plans with those tenants. Rent it to them at a reasonably discounted rate for a short period of time, and I get significant improvement to property, meaning investment in fertility, investment in cleaning out the drainage structures, investment in land leveling, investment in weed control, investment in timber clearing, just the general sprucing up of the property. And I get a tenant really excited to do those -- a new tenant really excited to do those things because they like the property's fundamental quality long-term, and they get to do it while getting the property for a period of time at a reasonably low rent. So it's a win for everybody, except the exiting party. But it's the exiting party who is the bad actor, if you will, and chose to leave, so I don't feel bad about it. And that's what's going on here. You just put a -- you put somebody really excited, determined to have a long-term outlook on this property. You help them from a financial point of view because of the luck of how we'd structured the transaction to really aggressively invest in the property and it's better for us and them when we go to roll the rent again from the original lease to a new lease, which as I said, is depending on the lease, 2 or 3 years away still.

And we have a question from Wes Hardy of 457 Cadaret, Grant.

Mr. Pittman, I did notice your active buying of the stock and thank you for supporting and believing in your own plans. I had a question about the balance sheet highlights. The fixed versus floating debt, it seems like there was actually an improvement. And I want to know if that was due to just mainly to the acquisition? Or if you guys have been working to structure more fixed debt?

I'm going to -- Luca, I'm going to let you go first on that one. What page, for everyone's benefit, 6?

Yes, we actually did lock in into -- we swapped some floating rates into some fixed rates, essentially.

Did you hear the answer? We locked floating into fixed.

Perfect. And it seemed like before, there were people who were wanting to see long-term deals, of acquisitions, future acquisitions. But it seems from, just from looking at the highlights, the company is in actually a better position now than it was at the same time last year. So is it mainly only the equity price being cited for the reason that you would, I think you said press pause for a little while or because of where commodities or rates are going to go?

Absolutely. I mean, if I was still running my private business that I had done, investing in farmland for 15 or 17 years before we went public, I would be aggressively acquiring farms right now. You buy in this sector when the commodity cycle's down and everybody says, "Farming stinks," and yada, yada, yada, because these long-term trend lines are not going to change. Global food demand's not going down. Land availability is not going to -- we're not discover a brand-new Iowa somewhere in the world. But the reality is, I'm running a public company now and I'm not going to sell our land cheap to keep growing. We're going to get recognized for the fair value underlying us. We own $1 billion of farmland, I'd like to own more, but that's already a lot, and we're going to sit tight in terms of common equity issuances until we see stock price recovery, and we'll improve our properties and negotiate our rents and keep our costs under control and the value will get recognized, is in our -- is our view. So that's kind of what we're doing.

This concludes our question-and-answer session. I would like to turn the conference back over to Paul A. Pittman for any closing remarks.

Well, thank you all very much for joining us. I hope this conference call and our continued expansion of the supplement will make the story and the investment more clear. If there is anything we have said today and you don't, frankly, understand it or want further discussion, please do feel free to give us a call here at the company, and we'll try to help you out as much as possible. Thank you again. Talk to you in the future. Bye now.

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