Farmland Partners Inc (FPI) 2020 Q3 法說會逐字稿

Good day, and welcome to the Farmland Partners, Inc. Third Quarter 2020 Earnings Conference Call. (Operator Instruction]. Please note that this event is being recorded. I would now like to turn the conference over to Paul Pittman, President and CEO. Please go ahead, sir.

Thank you. Good morning, and welcome to Farmland Partners Third Quarter 2020 Earnings Conference Call and Webcast. We appreciate you taking the time to join us for these calls. We see them as a very important opportunity to share with you our thinking and our strategy in a format less formal and more interactive than public filings and press releases.

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

Thanks, Paul, and thank you to all of you who are listening to this webcast either live or recorded. The press release announcing our third quarter earnings was distributed earlier this morning. A replay of this call will be available shortly after the conclusion of the call through November 19, 2020. The phone numbers to access the replay are provided in the earnings press release, for those who'll listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, November 9, 2020, 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 and potential acquisitions and dispositions, impact of acquisitions, dispositions and financing activities, business development opportunities 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 net operating income, FFO, adjusted FFO, EBITDAre and adjusted EBITDAre. Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the company's press release announcing third quarter earnings, which is available on our website, www.farmlandpartners.com, and is furnished as an exhibit to our current report on Form 8-K dated November 9, 2020. 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 -- sorry, this morning before market opened, and in documents we have filed with or furnished to the SEC.

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

Thank you, Luca. This morning, I want to make sort of 4-broad points about the company and the quarter and its performance. It's a relatively short set of comments today, and we will leave certainly time for questions at the end. This is, frankly, a pretty strong quarter for the company. Revenues are up, NOI is up. AFFO has improved. That's all in the face of a gradually shrinking portfolio size. So we feel pretty good about the performance for the quarter.

Turning for a second to COVID and its impact on us. As we said in the public filings, COVID has not impacted us very much to date. It does create certain uncertainties and has led to weakness in a couple of particular crop types, in particular, lemons and blueberries have struggled, other crop types are having challenges as well, but those 2, the struggles have been more significant. We've also seen some difficulty in corn demand. As you folks may know, corn prices have come up pretty strongly in the last 30 to 60 days. But they would have been even stronger had we maintained ethanol demand at pre-COVID levels.

Turning to the third point I want to make today. It's really about the stock buyback and the asset sales that we have done. We have bought back in the most recent quarter around 500,000 shares of stock. We have funded those buybacks as well as the other buybacks from asset sales. At this point, we have sold $104 million of assets at an average gain of 21.5% approximately. That's very significant. The reason I wanted to draw everyone's attention to this today is our view inside the company is that we estimate our assets are probably worth something in the neighborhood of 10% more than we have invested in those assets. If you think of that in terms of the valuation of the company, it leads you to prices that are significantly higher than our recent trading history. We put out today in our quotes in the press release that the management's estimate of NAV is $13 to $15. We haven't really discussed this in recent quarters, but we really did want to emphasize it. The company is active in buying back shares. I have personally continued to invest in the company. We want every shareholder to understand as we -- they may be selling shares to us that we are buying them because we fundamentally believe NAV is materially higher than the trading price that our stock is at today. Supporting that NAV of $13 to $15, you would have a range of values between approximately [950] which is just straight book value of the portfolio, and a high, if you used a cap rate based methodology of almost $18 per share. I think our view is that it's really somewhere in the middle of those ranges. Thus, the view -- the company's stated view that it's $13 to $15 a share. But again, we want to inform the market at least our perspective, as we continue with the buyback programs that we've got going on.

With that, I'll ask Luca to walk you through some key operating and financial highlights. So please go ahead, Luca.

Thanks, Paul. So here are some very summary financial highlights for the quarter and the year-to-date. In the quarter, we had total revenues of $10.6 million versus $9.8 million the same quarter a year ago. Total operating income of $3.6 million versus $3.2 million same quarter last year. And a basic net loss to common stockholders of $0.09 per share versus a net loss of $0.15 per share last quarter. AFFO per share this quarter was negative $0.04 versus negative $0.06. Those of you that follow our company are very familiar with this, but I always like to remind everybody that our company, the financial results because of the revenue recognition in connection with crop share leases, we have a fairly heavy seasonality in our financial results. So the financial results for the -- financial performance for the first 3 quarters of the year is really not indicative of the performance for the whole year. We expect this year, as in past years, to have a significantly better financial performance in the fourth quarter. So that's why we always look at our financial performance really as a whole year is concerned. Having said that, it's -- we -- and as Paul highlighted, this quarter was already showing the results of our revenue performance as well as our cost performance.

Finally, one last note. In the third quarter, as Paul mentioned, we repurchased approximately 510,000 shares of common stock. The current fully diluted share count as of today is 30,990,063.

This concludes my remarks on our operating performance for the third quarter of 2020. Thank you for your time this morning and your interest in Farmland Partners. Chuck, we would like to begin the questions-and-answer session.

[Operator Instruction]. And our first question will come from Rob Stevenson with Janney.

Paul, appreciate the detail and the thoughts on stock repurchases. How are you guys and the Board thinking about how much further you guys are willing to do with the market cap, call it, $200 million or so? The ability to buy back more stock versus shrinking and shrinking down to a point to where you're too small, et cetera, and to illiquid. How does that come into play for you guys? And at what point do you guys bring in outside capital and try to do something in that manner?

Look, our view is we are driven by shareholder value and -- for now, at least. We still think buying back our traded securities, whether it's the preferred or the common is a good investment. We will continue to do add-on acquisitions. But look, at -- as the quarter shows, we've shrunk the cost structure to manage the gradually shrinking portfolio size. And so we're going to keep going on those stock repurchases for the foreseeable future, subject to cash availability. If we can arbitrage asset values, frankly, double what the market gives us credit for, against stock buybacks, we're going to keep doing that. I'm a very large shareholder myself. That is in every shareholder's interest. The company fundamentally exists to create value for the shareholders, not to exist for reasons unto itself, so if that means the company gradually goes away, but we make shareholders a lot of money, we're going to keep doing it.

Okay. And then in terms of leases, did anything roll in the third quarter? And what do you have coming up over the next 6 to 9 months that rolls? And where do you expect those to renew at?

There's a pretty detailed table in the Q, and I don't frankly, remember the exact number. But we're rolling in the neighborhood of 1/3 of the leases every year, 25% to 1/3. The most common length of the lease is 3 years. So we're rolling over leases just like every year during the fall. Those lease renewals are going reasonably well. With the exception of a few difficult properties, you're getting modest increases in leases, just like we've seen in the past. Farmers are generally in the row crop sectors of the country. Reasonably optimistic. You're seeing better prices for both -- for all of corn, soybeans and wheat, than you've seen now in quite a few years. And we finally appear to have pushed through kind of a long-term oversupply situation and possibly heading back into a bit of a shortage situation. So the lease renewal processes is going at least as well as years past and probably a little bit better.

Okay. And then have you guys had any damage from any of the south -- the southern storms or anything? I can't remember how much you guys have in California these days, but anything from the wildfires out there as well?

Yes. So starting with the storms in the southeast, we've had a little bit of damage on some farms, but we're actually reasonably lucky in this cycle. In terms of damaged irrigation units and other things. In the years past, we've actually been unlucky. We got one farm hit twice in one year, couple of years ago. This year, it's kind of skirted around us, so no real impacts. As far as we know, as of yet, the hurricane season is not completely over.

Turning to California. A couple of negative impacts from the wildfires that are industry-wide, not really specific to us. When you leave a permanent overcast, over the Central Valley of California for 60 days, maybe 90 days straight. It does significant things to the growing conditions for those plants. And so you had some unusual things occurring in the ripening process of virtually all of the products that were sort of in a significant portion of the growth phase while those fires were going on. A lot of wine grapes, for example, get a different taste because of the smoke in the air and the lack of sunlight. Those things don't wipe out a crop, but they're generally negative to the crop, either in volume or in quality. And so the wildfires were certainly not a good thing for California agriculture. California between COVID, leftover issues from the trade war and fires, not a very good year, frankly, for Central Valley of California agriculture. But again, that's why we run a large portfolio. You'll pull-through. And then a few years from now, we'll be talking about why California is so good and the rest of the country is possibly struggling. That's the nature of it.

Our next question will come from Quinton Mathews, investor.

A couple of questions. So your filings have had the commentary on insurance on the class action lawsuits that you're -- don't know exactly what the language is, but I guess you're still in negotiations with them. Can you update everybody on where that are? I mean I would think 2 years past, you would know whether you were going to be covered in your coverage there.

So for everyone's benefit, Quinton Mathews, aka Rota Fortunae is asking this question. Quinton, I would prefer you not appear on my public phone calls and harass the company, but if you choose to, I will respond. So our perspective is that what we have in our disclosures regarding our insurance is accurate, and we will continue to disclose appropriately as time goes on. So Quinton, what company are you short and distorting today?

I never shorted and distorted anything, and I'm a public participant. I'm not harassing you or your shareholders. I'm asking questions as a market participant. So...

Well, the person on the organizer of the call cut that line off, we're in active litigation with this individual. I'm not answering any more questions. Thank you.

Our next question will come from Buck Horne with Raymond James & Associates.

Just one quick one for me. I'm just curious about the dispositions that you guys have on tap for the fourth quarter and looks like a fairly large one in the first quarter of '21 that's under contract. And just to the extent you can -- any particular color on crop types or other types of what you're thinking of selling here in the near term? And if the proceeds, you expect the vast majority of that to go to repurchases? Or are there any other cash commitments you have in mind for the proceeds?

So just turning to the disposition that we announced for Q1, we normally do not announce transactions that have not closed this is an unusual transaction in the sense that we collected a multimillion-dollar nonrefundable deposit on that transaction, which we've already got in our bank accounts. So we felt that unlike typical contracts, this is virtually certain to close. So we felt it was appropriate to disclose. That's a large farm in the southeast that someone had an interest in acquiring and made a proposal that was quite strong. And so we agreed to put it under contract and sell it. The -- in terms of our general point of view, everything in the portfolio is for sale. If we get an appropriate offer on virtually any asset, we will sell that asset. Our perspective, though, is that we look at our portfolio was sort of 3 different layers as we think about our assets, we think about what we call our crown jewels. Meaning farms that are incredibly unique and valuable in the sense that they're the best farms in a certain geography. The -- and those farms, we're unlikely to sell, unless it is a materially higher price than we frankly think that farm is worth, meaning it's not that the acquirer is doing something crazy. It may be a neighboring farmer. They have a reason that it's more valuable to them than it is to us. And if they make a convincing offer in one of our crown jewels, as we call it, we will sell it.

A lot of our portfolio is good farms, but not absolutely great farms. Those farms, we're happy to trade them, again, if somebody wants to pay more than we think there we're -- those farms are -- most of where we're making sales would be in that middle grouping of good but not great farms. And then we frankly have, like anyone would have in a portfolio of this size, a few farms that we do not like very much. We don't tell anybody what those farms are because we don't want the anticompetitive nature of getting that news getting out. But those farms, we're happy to move at any price slightly better than what we paid for them. We're happy to let them go. And so we're managing the portfolio. We're -- our best investment, in our view, is to continue to acquire our own stock back, and that's what we'll keep doing.

Our next question comes from [Mark Blodak], investor as well.

A couple -- just a couple of quick things. Do you have an update on interest costs now, guidance that -- now that you've refinanced that loan there from Farmer Mac? And then also, what are you guys thinking about in terms of the preferred, I see that -- didn't repurchase any shares there. Just curious about that. I know that prices moved up significantly. So it makes me wonder about that. So those are the 2 questions I have.

Sure. I'll let Luca look up some data possibly on insurance rates if we have. If we haven't in the public -- interest rates. We have in the public domain, happy to disclose it. Let me give you a general comment, though, while he's doing that. The interest rates for the company have been shrinking, as you can see in the P&L. We have a relatively significant portion of that portfolio that is of debt that's adjustable, and that continues to decline. We think that you're not going to see it continue to go down in the coming quarters as much as it had in the last couple because those interest rates reset every month or every 3 months, and it's taken a while to sort of get the benefit of general interest rate reductions through the portfolio. But we think we've got most of that now.

In terms of the buyback of preferred we think that the preferred is an interesting buyback opportunity because the face amount of that rate -- coupon rate on that preferred is so high, that we can -- we do buy it back from time to time. But we think it is a far better bargain for the company to acquire the common stock, which is why we've been buying it back at such an aggressive rate. But we switched back and forth between those things. If we could buy in a significant percentage of the preferred, we try to. The problem we frankly face is that no one wants to sell that preferred. If you're getting that coupon on a secure preferred instrument with inflation protection upside, which is essentially what that accretive value factor is on that security, people just don't want to sell it. And when we've gone to the market to try to buy it back, literally trying to buy 1,000 units a day is often hard. So it's tough to pull that in. Luca, I don't know if you have the answer on the question?

Yes, [Mark], I will refer -- I would prefer if you just look at the Q that we will file after market close. I don't want to give too many details while the market is open. However, what you will see is our interest expense and the interest rates that we are paying are what you would expect, given what's happening in the broader debt market, specifically also with the other element that because of the timing of rate resets, there was a little bit of a lag in some cases before we were fully caught up with the lower interest rates. So you won't find any surprises when you will see the Q later tonight.

And our next question will come from [Victor Krellenberger], investor.

I joined the call a little early, so -- or a little late, so if you already covered this, please let me know. But I heard that you're -- the cash management is a very big deal for you guys, and you're using a lot of the money to buy back shares. Based partially on your own valuation of the portfolio, can you talk about the range of cap rates you're using? And how do you develop your numerator for that valuation? Is it just the rents being paid? Is it -- or are there any adjustments to that?

Well, we look at our valuation internally in sort of a handful of different ways. And when we used to do a more detailed supplemental, you'll see those methodologies, I think we haven't done one now in a year or more, but if -- I'm sure they're still in the public filings. You can see a description of the internal methodologies we use. We look at book value as a sort of floor in terms of our valuation. We also look at book value adjusted for a couple of different things. We have what we call the IPO adjustment, and that is the properties that were the original portfolio that I contributed to the company at the time of the IPO. Many of those properties have been owned since the late 1990s. So they are carried in our books at a book value well below -- fantastically below, frankly, their true market value.

So if you make that adjustment, your book values would come up another dollar or so the -- if you look at -- if you adjust that book value yet again, for what we believe is about -- as I said in the phone call, about a 10% premium to what we've invested in these properties is what we think they're worth today. You start to get valuations that are up there in that $13 to $15 range. So that's kind of one method.

The second method is what we view as a roll forward of our purchase prices of these properties. And then we appreciate them or depreciate them through time, based on the USDA land values survey. When we do those methodologies, we're again getting in that kind of $13 to $15 range. That is actually the methodology that we view as probably the most accurate. We do, from time to time, have appraisals on certain properties that are required by lenders. We look at those appraisals. We're sometimes skeptical of appraisals as an institution because this is an asset class where under 2% of assets are sold in any given year. And so it's kind of hard to extrapolate from 2% of assets the other 98%, purely as a valuation metric.

Then finally, we go to the cap rate model. And this, to me, is the most unreliable model. As I said in the main comments, that's driving today about an $18 a share value. And we don't, frankly, think our stock is worth $18 a share. The reason it's driving that kind of value is you -- it's based on a trailing 12 months' view of our gross revenues and then it's viewed on the cap rates that we're seeing in the marketplace. This asset class, unlike many other real estate asset classes, does not see a decline in the underlying asset values when rents stagnate or even pull back. And so what you see happen is you see a compression essentially of cap rates in the market temporarily. And if you do a strict cap rate based valuation you drive, as I said, I think, unrealistic per share values. Today, the blended average of our cap rates across the country is in the kind of low 4% range is what we're seeing. That's a relatively historically low number. The cap rates in agriculture are largely related -- correlated with the 10-year and the 10-year is at historically low numbers, so it would make sense, the cap rates are at historically low numbers. When you get into the corn belt itself, you're seeing farms trade at 3%, sometimes even 2.5% cap rates kind of purchase price per acre looking at -- versus rent per acre. So that's kind of the background and a little more about our valuation approach internally. I hope that helps.

Okay. I appreciate it. Yes, that's unsurprising, but I appreciate you keeping on top of it.

Our next question will come from [Bert Derwitz] with [Regis University].

Paul, it's [Kurt] with [Anderson Reports]. Just had 2 quick questions for you. One was, do you have a target capital structure? The other one is, do you have any idea how long it might take for the stock price to catch up to the NAV per your buyback strategy?

Yes. So let me start with the second question. I have no idea. I would have thought it would have happened by now and it hasn't. But we're going to keep -- we're confident in our approach. So we're going to keep acquiring back -- selling assets and acquiring back stock, until that gap is closed. But your guess is as good as mine. REIT says, as we all understand, tend to trade, frankly, as a multiple of cash flow. And so I think that rental rate recovery and improved cash flows may drive stock valuation more than underlying asset value. I think that's just the reality of how the market works. I don't necessarily agree with that in terms of true value of the portfolio, but that's the nature of being a publicly traded REIT.

If you don't mind, repeat your first question for a second because I've kind of forgotten it.

I was asking if you had a target cap rate -- or excuse me, a target capital structure? Yes.

Target cap structure? Yes. I mean, our view is that this asset class has materially more rent stability, in good times and bad, than most of the real estate asset classes. This is undoubtedly true in this era of COVID. We have not seen anything close to the negative impact in our rental collections that you've seen in many other real estate classes. So we are comfortable running at a higher leverage ratio than I think most other REITs. If you look at the leverage ratio that we have just looking at straight debt, it's in the neighborhood of the mid-40s percent of our overall capital structure. If you add in the 2 different preferred securities we have, you're pushing into the high-60s percent, I believe. That's probably over-levered at that point. As continuing to buy back stock gradually makes that number, frankly, worse. But as I've said a couple of times, the valuation differential between what we think the stock is worth and what it's trading at, drives us to go ahead and buy that stock back, despite the negative impact on the overall leverage ratio of the company. It's important to recognize that those 2 preferreds are really long-term sources of financing. The pref-A is callable for the first -- we issued that 5 years ago. It's a 3% coupon instrument. That is callable, starting in February of this year, although I don't know why we would call it at that kind of rate, but it is not required to be taken out for another 5 years. So that's a great piece of long-term financing for us.

The preferred is callable for the first time next August, this is preferred B. That is a 6% coupon with a appreciation factor, based on the asset class appreciation that occurs. But again, that security, I think, is callable for the first time next August, but we have another 4 years after that before we're required to take it out. So we have a lot of sort of balance sheet flexibility in terms of gradually shrinking the portfolio and buying back assets without getting under any sort of serious pressure to do anything rapidly. The real question is the one Rob Stevenson, I think, asked at the beginning, if we gradually continue to shrink the portfolio, we've got to do our best to keep our costs down. I hope that's helpful.

And our next question will come from [John Judy], investor.

I just wondered if you could comment on your lawsuit against Rota Fortunae, if that's still ongoing or any progress on that?

Yes. It is still ongoing. That is an active lawsuit. We intend to continue to pursue it. Until we win, we're looking to win 2 different things: clear vindication that, that was a fraud committed against us and our shareholders by Rota Fortunae, Quinton Mathews is his name, and by Sabrepoint. That is the hedge fund that paid Quinton Mathews to write that article and took out many of the short positions in our company, and liquidated those short positions into the panic that their article caused. This is a -- for us, this is a very, very serious issue, and we intend to run at the ground. It cost our shareholders a great deal of money. It's cost the company its reputation. And we're not going to drop it. Now we're not going to engage in recreational litigation, but we do believe there is a substantial financial recovery that can be achieved. And we're going to pursue that until we either lose some court cases. At this point, we seem to win most of the -- motion practice. We're either going to pursue it until we win or until it becomes clear we can't win. And that's our posture there. Just to make a comment, the related case, which is frankly even more frustrating is that we were sued by the class action lawyers for the stock drop. That continues to cost the company money that we -- that's coming from all the real shareholders. But that's the legal system we live in. It's very plaintiff-favorable in terms of class action lawsuits. But we intend to continue to fight that as well as we go forward.

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

Thank you all for your continued interest in our company. Feel free to reach out to the company and the management at any point in time between these phone calls when we can be helpful to you. Again, thank you very much for your support of our company. Have a good day.

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