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Edited Transcript of FPI earnings conference call or presentation 6-Nov-18 4:00pm GMT

Q3 2018 Farmland Partners Inc Earnings Call

Westminster Nov 16, 2018 (Thomson StreetEvents) -- Edited Transcript of Farmland Partners Inc earnings conference call or presentation Tuesday, November 6, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luca Fabbri

Farmland Partners Inc. - CFO & Treasurer

* Paul A. Pittman

Farmland Partners Inc. - Executive Chairman, CEO & President

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Conference Call Participants

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* Marnie Georges

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Presentation

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Operator [1]

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Good day, and welcome to the Farmland Partners Inc. Third Quarter 2018 Earnings Conference Call and Webcast. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Paul Pittman, Chairman and Chief Executive Officer. Please go ahead, sir.

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Paul A. Pittman, Farmland Partners Inc. - Executive Chairman, CEO & President [2]

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Thank you, Rocco. Good morning, and welcome to Farmland Partners Third Quarter 2018 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 strategy in a format less formal and more interactive than public filings and press releases.

Please refer to Investor Relations section of our website at farmlandpartners.com for our Q3 2018 supplemental package. 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.

I will now turn over the call to Luca for some customary preliminary remarks. Luca?

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Luca Fabbri, Farmland Partners Inc. - CFO & Treasurer [3]

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Thank you, Paul. The press release announcing our third quarter earnings was distributed yesterday evening. A replay of this call will be available shortly after the conclusion of the call through November 20, 2018. The phone numbers to access the replay are provided in the earnings press release distributed yesterday night.

For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, November 6, 2018, and have not been updated subsequent to the initial earnings calls.

During this call, we will make forward-looking statements, including statements related to the future performance of our portfolio; our identified acquisitions, dispositions and farm properties under evaluation; impact of acquisitions, dispositions and financing activities; as well as comments in our outlook for our business, rents and the broader agricultural market.

We also will 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 5, 2018.

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?

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Paul A. Pittman, Farmland Partners Inc. - Executive Chairman, CEO & President [4]

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Thank you, Luca. So if I was to summarize this quarter, I would say it is -- continues to be a disappointing stock price and okay operational quarter and a powerful demonstration of the underlying shareholder value creation we can make in this company through asset sales and the repurchase of stock.

Starting with operational issues. We have approximately 1/3 of our leases are up for renewal in late 2018 or early 2019. At these -- at this point, we have re-leased approximately half of these open leases. We would anticipate that they will all be leased before the start of the farming season in 2019.

On average, we are seeing rent increases of approximately 1% on our new leases and also about 40% of our leases today have automatic rent bumps in the second and third year of leases. So on balance, we estimate that base rental revenues in 2019 will be up in the neighborhood of 1%. For participating revenues, it's just too early to give meaningful predictions since weather, crop price and alternate bearing crops have such a major impact on participating revenues.

The second operational issue I want to address relates to 2 hurricanes in the Southeast, a major heat event in Southern California and the ongoing trade wars. These events will probably have a modestly negative impact on fourth quarter revenues. This impact will be felt, in some cases, in lower yield or lower price or, most likely, in the case of slightly delayed revenue recognition that may push out revenues normally received in the fourth quarter into the first quarter of next year. As far as asset values go, the uninsured impacts on asset value from the weather events was immaterial based on what we know at this time.

Turning to asset sales. We have completed farm sales in the third quarter of about $29.9 million. Adding this to the previous quarter, the year-to-date asset sales have been $31.9 million with a gain of about 11.7% over book value. These asset sales have been reasonably broadly distributed in the portfolio. Some have been in the Corn Belt, some in the Delta and some in the High Plains.

Taking into account the use of leverage and rental income we received while we own these farms, the IRR was approximately 10.7% on an unlevered basis and 18.4% on a levered basis. We expect to continue asset sales at a modest pace.

Now for a bit of a comment about the net asset value of our stock. We look at portfolio value in 3 different ways. This leads to an NAV per share that is represented by each methodology. In the supplemental, we do a traditional REIT cap rate-based calculation. Today, that would lead you to an NAV of approximately $16 per share. On a book value basis, we would be at about $9.85 a share. And if you look at the USDA land value survey-based methodology, we end up with an NAV of approximately $12 to $12.20. Management, when it considers those 3 different methodologies, still believes that the NAV per share is approximately $11.50 to $12.50 per share.

Despite the rapidly increasing valuation, if you gave -- only gave weight to the traditional cap rate-based methodology, we believe that today fundamentally overshoots the valuation per share of the company because, as we have said in the past, the primary methodology of valuing farm properties is comparables based, not cap rate based.

We have since July 1 bought back 1,652,178 shares. That represents about 4.4% of the shares outstanding on July 1. Using an NAV of about $12 a share, we will have created through those buybacks about $8.3 million of shareholder value. Given that the source of funds is asset sales made an 11% to 12% above book value, the return to our shareholders from these buybacks is even more significant. We expect to continue repurchasing shares based on funds availability as long as the share price stays depressed.

Now finally, a quick comment regarding the Rota Fortunae, or Wheel of Fortune, attack on our company. Our effort to achieve justice and financial recovery for our shareholders for the damage caused by the market manipulation and the false statements related to Rota Fortunae and Wheel of Fortune attack on our stock on July 11 continues. We feel cautiously optimistic that we will achieve our goals, albeit at a pace slower than we would like.

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

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Luca Fabbri, Farmland Partners Inc. - CFO & Treasurer [5]

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Thank you, Paul. I would like to walk you now through some of the financial highlights regarding the quarter and the year to date.

The revenues in the third quarter were $12.6 million, a 4.2% increase over the same period in the prior year, with operating income at $6.2 million, a 0.7% increase. Year-to-date revenues were $35.2 million, a 15% increase year-over-year, with operating income at $16.2 million, a 31% increase year-over-year. Adjusted EBITDAre in the quarter was $8.8 million. Basic net loss to common stockholders in the quarter was $0.02, so was AFFO per share, $0.02. As Paul mentioned, we had in the third quarter asset sales totaling about $30 million at a gain in excess of 11%.

I also wanted to remind you, as we've addressed in the past and Paul somewhat addressed already, there is -- given the seasonality of revenues and AFFO, we still expect the bulk of revenues and, more importantly, a vast majority of AFFO to still come in the fourth quarter of the year.

Also in the quarter, as Paul already somewhat addressed, we repurchased 1.2 million shares with about 0.5 million shares purchased right after the quarter close and before our window for repurchases was closed. The current fully diluted share count is about 35.8 million shares.

This concludes my remark on our operating performance for the third quarter of 2018. Thank you for your time this morning and your interest in Farmland Partners.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from Marnie Georges of Raymond James.

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Marnie Georges, [2]

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To start, I'd like to just circle back to the disposition activity that you're expecting. Do you have anything else under contract to be sold right now? Any color on potential cap rates you've been seeing, just as far as it goes to asset dispositions through the end the year and looking ahead to next year?

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Paul A. Pittman, Farmland Partners Inc. - Executive Chairman, CEO & President [3]

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Yes. Our tradition as a company is that until a transaction is closed, we don't actually announce it, and I don't want to sort of break that policy. I would anticipate, though, that we will continue to have some asset sales in the fourth quarter and the first quarter of next year at something in the neighborhood of the pace we are currently on.

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Marnie Georges, [4]

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Great. And then a second one for me. Turning to the balance sheet. How are you thinking about prioritizing buying back stock given where shares are trading versus kind of looking at your exposure to floating-rate debt given what interest rates have been doing?

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Paul A. Pittman, Farmland Partners Inc. - Executive Chairman, CEO & President [5]

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Yes. The -- automatically, we are repaying debt whenever we make an asset sale because virtually, every farm we own has some amount of leverage. So in round numbers, something like 40% of the sales price goes to debt reduction just automatically on every transaction. Beyond that though, the consideration becomes a balance of do you buyback common stock, which is trading at an incredibly deep discount; do you buy back preferred stock, which has a dividend that today's price is in a 6% plus range; or do you pay off debt. At the current stock price in the $7 range, we still think buying back common is probably the most effective use of our capital, and we'll continue to do that. But as the stock price continues to appreciate, we may accelerate debt repayment and/or preferred repurchases depending on what kind of we see at the time we do it.

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Operator [6]

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(Operator Instructions) Today's next question comes from [Don Johnson], a private investor.

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Unidentified Participant, [7]

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Just wanted to tackle your comments in regards to getting some rate increases on your leases. Today, in the ag environment, we're looking at higher input cost in regards to chemicals and fertilizer prices, anywhere from 15% to 25%, due to environmental protection efforts

(technical difficulty)

which has been, of course, increases for

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service side

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on the products and the tight operating cash for growers via lower commodity prices and higher operating loan interest rates. How do you feel you can not only maintain your rates on your leases but also see an increase of 1%?

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Paul A. Pittman, Farmland Partners Inc. - Executive Chairman, CEO & President [8]

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Yes. So that question frankly indicated a relatively significant misunderstanding of how the farm rental economy works. So let me go through a couple of things broader than the question you even asked. So we're not seeing for our tenants 15% to 25% increases in inputs. I am sure Bayer and DowDuPont and others would like to get those increases, but that's just not reality. That's not what's happening. There are increases, but they're not of that scale. The second point is that the scarcest resource in agriculture is the land itself. There is not a 0 vacancy of seed and chemicals and fertilizer. You're never going to call up Bayer and have them tell you they're out of seed. Never going to happen. They're not going to be out of Roundup. They're not going to be out of Dicamba. So there is no reason, when you think about this on an economic perspective, to think that the landholders, meaning people like us, shouldn't have, relatively speaking, more market power than anyone else in that food chain because we are the ones with the scarce resource. The third point is these rental increases of 1% are actually reasonably disappointing. The long-term average rental increase for row crop farmland is in the neighborhood of 3% to 4%, and we're now running several years in a row. So the baseline is not 0. The trend line is 3% to 4% up. And so when you're only getting a 1%, we are actually hitting at an increase lower than what we would have expected sort of from a long-term predictive model perspective. So we are 1%. While I'm happy it's positive, it's nothing to be incredibly excited about. So I hope that kind of clears that up. That's just the rental increases we're seeing in the marketplace.

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Operator [9]

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And ladies and gentlemen, as a follow-up, we have Marnie Georges from Raymond James.

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Marnie Georges, [10]

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Wanting to circle back to the acquisition that you guys completed during the quarter. Do you have any color on that, the couple of acres that were bought in the Corn Belt?

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Paul A. Pittman, Farmland Partners Inc. - Executive Chairman, CEO & President [11]

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Yes, we had a -- we were presented with an opportunity through one of our tenants to make a significant add-on acquisition in the neighborhood of some other properties we already own at what we thought was a very compelling value. Even in the context of, broadly speaking, selling assets, if we have an opportunity to acquire something at a price we believe is very attractive, we're going to go ahead and do it. And that's what we did. So it's a good, high-quality row crop farm at a good price that was brought to us by one of our tenants in the Midwest.

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Marnie Georges, [12]

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Great. Do you think moving forward, you'll mainly do more of those relationship-based acquisition opportunities?

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Paul A. Pittman, Farmland Partners Inc. - Executive Chairman, CEO & President [13]

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Oh, at -- I mean, at this point, that's frankly likely to be the only acquisitions we do because only -- the only opportunity for deep value acquisitions tends to be when your tenant, meaning a local farmer, brings you an idea or brings you a deal. Because as common sense would suggest, the very best deals will be always sort of taken up by the locals before -- as plugged in as we are to agriculture before they get to us and certainly before they get to most other institutional investors.

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Marnie Georges, [14]

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Totally fair. Turning into -- looking back, I guess, at more of the ongoing lawsuit, do you have any ideas on how we should think about legal costs in 4Q versus what you guys kind of registered in 3Q given that the litigation is still ongoing?

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Paul A. Pittman, Farmland Partners Inc. - Executive Chairman, CEO & President [15]

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Well, there's a -- we did not use today in terms of financial reporting any of the insurance coverage that we will have for those litigation costs. That's not to say that we don't believe we'll recover. But out of sort of sense of conservatism, we went ahead and took all of those legal expenses against the P&L until such time as we determine the absolute insurance recovery. I think there's a reasonably detailed discussion in the MD&A of our view of recovery.

Luca, you want to add anything to that?

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Luca Fabbri, Farmland Partners Inc. - CFO & Treasurer [16]

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Yes. Specifically, when we file the Q later this week, you will see a discussion around this. Of course, we have certain expectations of insurance recovery. We expect that all the costs that we incurred in these litigations are really recoverable above and beyond a retention level of $350,000. So in the fourth quarter, we expect net-net the legal costs to be much lower than we had in Q3, but hard to predict at this point.

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Operator [17]

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(Operator Instructions) I'm showing no further questions. Back over to the management team for any final remarks.

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Paul A. Pittman, Farmland Partners Inc. - Executive Chairman, CEO & President [18]

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Thank you. We appreciate your interest in the company and look forward to continuing these discussions in the coming quarters. Thank you very much, and goodbye now.

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Operator [19]

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Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.