Federal Agricultural Mortgage Corporation (AGM) Q4 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Farmer Mac Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Jalpa Nazareth, Director of Investor Relations. Please go ahead.

Good afternoon and thank you for joining us for our fourth quarter and full year 2022 earnings conference call. I'm Jalpa Nazareth, Director of Investor Relations and Finance Strategy here at Farmer Mac. As we begin, please note that the information provided during this call may contain forward-looking statements about the company's business strategies and prospects which are based on management's current expectations and assumptions. These statements are not a guarantee of future performance and are subject to the risks and uncertainties that could cause our actual results to differ materially from those projected. Please refer to Farmer Mac's 2022 Annual Report on Form 10-K filed with the SEC earlier today for a full discussion of the company's risk factors. On today's call, we will also be discussing certain non-GAAP financial measures. Disclosures and reconciliations of these non-GAAP measures can be found in the 2022 Form 10-K and earnings release posted on Farmer Mac's website farmermac.com under the financial information portion of the Investors section. Joining us from management this morning is our President and CEO Brad Nordholm, who will discuss 2022 business and financial highlights and strategic objectives, and CFO, Aparna Ramesh, who will provide greater detail on our financial performance. Select members of our management team will also be joining us for the question-and-answer period. At this time, I'll turn the call over to President and CEO Brad Nordholm. Brad?

Thanks, Jalpa. Good afternoon, everyone and thank you for joining us. I'm very pleased to announce that we had a record year for revenue, earnings, net effective spread and outstanding volume in nearly all of our business segments while maintaining strong credit quality. Throughout 2022 we continued execution on our strategic initiatives building partnerships with our customers, maintaining asset liability management discipline and continuing to diversify our revenue streams while maintaining a single though of this on our mission. More specifically, we concluded the year with 16% year-over-year growth in net effective spread, 10% growth in core earnings, and 10% growth in outstanding business volume for assets under management. I'm incredibly proud of the contributions of our 158 team members. It starts with them and their passion for American agriculture and rural infrastructure, and they deliver because of their expertise and specialization that differentiates us. I happen to believe that it is this passion, expertise, and specialization coupled with our exceptional access to debt, securitization, market funding and asset liability management that enables us to deliver consistently strong financial results. One of our strategic initiatives has been to broaden our business, those segments that we report to you, and the benefits of that increasing diversification were apparent in our 2022 results. When rapidly rising interest rates had a more immediate impact on our f Farm & Ranch segment, it had the opposite impact on our wholesale funding, our AgVantage product because we are more comparatively competitive with Federal Reserve Bank alternatives than we were during the pandemic. Similarly, our Rural Infrastructure segment showed less interest rate sensitivity, and we've booked record amounts to telecom and renewable energy project finance loans. Diversifying our loan portfolio has been a key priority over the last few years, and that diversification is benefiting us through changing market cycles. In 2022, we've provided a gross $9 billion in liquidity and lending capacity to lenders serving rural America, reflecting net year-over-year outstanding business volume growth of $2.3 billion. The Agricultural Finance line of business grew $1.7 billion last year, which is predominantly driven by growth in the Farm & Ranch AgVantage Securities portfolio and loan purchase volume. The overall growth in the wholesale financing space continues to reflect many of our institutional counterparties, adding longer term AgVantage Securities to manage their asset liability maturity profiles, given the recent increases in interest rates and the comparative competitiveness of Farmer Mac AgVantage pricing relative to other market and Fed Reserve Bank derived options. We added a net $880 million in New Farm & Ranch AgVantage Securities in 2022 compared to $300 million in 2021. Looking ahead, we believe that especially in this volatile interest rate environment that Farmer Mac can continue to be viewed as a crucial relative value for refinancing and possibly for incremental borrowing for our longstanding AgVantage counterparties. To add some additional detail, our Farm & Ranch loan purchase volume growth of 8% year-over-year was modest compared to prior years as ours were adjusting to higher rate environments and being more opportunistic. We're optimistic the potential increases in loan purchase opportunities in 2023 will happen given the strong cash position of farmers and ranchers as they head into their 2023 planning and planting seasons. Our Corporate AgFinance segment grew $65.7 million to $1.6 billion. That's year-over-year 2022 to year 2021. This is a relatively new business initiative for Farmer Mac that supports loans to larger, more complex agribusinesses focused on entities that span the food supply chain. The persistent volatility and uncertainty in the market slowed deal opportunities in 2022 with many transactions on pause waiting for signs of market stabilization. While net gross saw only a modest increase in 2022, primarily due to sizeable payoffs, we were able to purchase approximately $330 million of new loans at very accretive spreads, which supported a very strong increase in revenues for this segment. Over in the fourth quarter 2022, and so far in the first quarter of 2023, we've seen an increase in deal flow in the market and are starting to build a strong pipeline for this year. These deals continue to be very accretive from an NES standpoint and a key component of our diversification strategy. We expect this segment to have meaningful impacts on results in the future and to enable Farmer Mac to continue to strengthen and deliver on our mission. 2022 was a very strong year for Rural Infrastructure as the diversification of this line of business is providing significant growth opportunities across numerous key sub-segment markets. During the year, we added $608 million of business reflecting year-over-year growth of about 10% in the Renewable Energy, Telecommunications and core Rural Utilities sub-sectors. Loan purchase volume in the Rural Utilities sector increased 22% in 2022, primarily due to borrowers normal course capital expenditures that were related to maintaining and upgrading the utility infrastructure as well as investments in broadband infrastructure. Farmer Mac acquired over $230 million in telecommunication loans in 2022, and there is a growing investment in fiber and broadband in rural America and an increasing recognition of the need for widespread investment in these areas. We remain committed to increasing investment and to reduce the cost of capital for telecommunication providers, and we look forward to providing updates on this new avenue of growth for Farmer Mac. Our Renewable Energy portfolio had an exceptional year with over $140 million in net growth in solar and wind transactions from a number of counterparties. Our participation in a few broadly syndicated renewable energy transactions has increased potential counterparties to source transactions from us in future years. The pipeline remains strong in the near-term as we continue to focus on upsizing existing deals and bringing on new renewable energy opportunities. As I've said on prior calls, renewable energy is both an important economic development opportunity for rural America and a business opportunity for us. As you may have seen yesterday afternoon, I'm very pleased to announce that we have successfully closed on our third $300 million, approximately $300 million agriculture mortgage backed securitization transaction. Securitization continues to be a tremendous opportunity for Farmer Mac and offers us many long-term benefits. One for example, that since the successful introduction of FARM series program, we've met with customers who have shown interest in potential securitization products that help them achieve their return objectives. While we're still in the early stages of building the program, our return to the market shows our commitment to being a regular issue for the set of securitization products that align with both our borrower and investor interests. Developing this capital flow to American agricultural producers exemplifies Farmer Mac's core mission to lower cost for the end borrower, and improve credit availability in rural America while also creating a well-received new investment opportunity for leading institutional investors. The U.S. agricultural economy continues to benefit from strong export demand and elevated commodity prices. Farmland values reached record highs in many states in 2022, primarily due to record levels of farm income over the last couple of years. While input costs are expected to remain elevated in 2023, limited global annual crops should continue to support commodity prices. We believe our portfolio is sufficiently balanced to withstand the market volatility that could arise should the U.S. economy move into a recessionary period as agriculture, food, and infrastructure industries tend not to be directly correlated or positively correlated with the general economy. We believe these sectors are generally well positioned to withstand an economic downturn due to ample consumer demand as well as government support. Now, before turning to Aparna, I'm very pleased to announce a 16% $0.15 per share increase in our quarterly common stock dividend. That will take it to $1.10 per share starting in the first quarter of 2023. In deciding to increase Farmer Mac's common stock dividend and maintain our payout target, our Board of Directors considered our strong capital position and the consistency of and outlook for our earnings, all to support our business and to exceed our regulatory capital requirements. This is the 12th consecutive year that Farmer Mac has increased its quarterly dividend. Looking ahead, we'll strive to continue to be a source of stability to our customers by remaining adaptive and flexible to meet their needs in this changing environment while remaining vigilant about any implications of potential market interactions. The foundation of our strategy is our strong financial position and proactive management of our balance sheet and funding sources, which positions us well in changing credit environments and enables us to continue to deliver on our mission and create more opportunities for us to enhance shareholder value for you. And with that, I'll turn it to Aparna Ramesh our Chief Financial Officer to discuss our financial results in more detail. Aparna?

Thank you, Brad, and good morning everyone. 2022 was a remarkable year for Farmer Mac. Results were strong across the board, highlighting our balanced, well measured approach, excellent credit quality and resiliency throughout market cycle. Our performance in fourth quarter 2022 enabled us to finish the year with very strong momentum. Core earnings were $34.4 million or $3.16 per share in first quarter 2022 and $124.3 million, or $11.42 per share in 2022, reflecting double-digit year-over-year growth driven by record net effective spread of $71.1 million in fourth quarter and $255.5 million for the year, the sequential improvement of the spread over the course of the year, for the product of the compositional shift in our program assets and generally wider spread across the board. As we have seen in particular, higher pricing on Corporate Corporate AgFinance loans and AgVantage volumes in some part driven by the higher rate environment. Another evolving factor that we have mentioned in prior calls that has contributed to net effective spread is that over the past few years, we opportunistically raised low cost debt and capital. This excess capital reduces the need for us to raise more expensive term and callable debt in a rising rate environment. This is expected to continue to create a downward pressure on our non-GAAP funding costs as the short end of the curve continues to increase with fed actions and the reinvesting of excess capital generates additional return. Our liability side of the balance sheet remains strong as we continue to benefit from the low cost debt that we raised when rates were low and this makes us well insulated as rates rise. The extension of debt has also strengthened our overall liquidity profile. We continue to maintain disciplined asset liability management. We carefully analyze the duration and convexity matches to minimize our interest rate risk as rates rise or ebb [ph]. Our forward-looking funding strategies, coupled with a prudent approach to hedging, have allowed us to maintain an enhanced profitability despite an inversion in the yield curve. Turning to operating expenses, operating expenses increased by 11% year-over-year due to increased headcount, increased stock compensation, and increased spending on software licenses and information technology along with consultants to support growth and strategic initiatives. Our efficiency ratio or operating efficiency ratio was 28.5% at year end, and this was better than our strategic planned target of 30%. We expect overall operating expenses to increase at a pace above historical averages due to investments that are needed to support core infrastructure and additional headcount to develop critical capabilities. We're especially pleased with our efficiency ratio and our cost containment strategies, given the inflationary headwinds that all companies are experiencing and that are impacting the market as a whole. As we said previously, we will continue to closely monitor our efficiency ratio and we are committed to holding the run rate efficiency ratio at 30% or lower. However, as we make decisions to invest in infrastructure and funding platforms and scale for further growth, we may see some temporary increases above the 30% level. On this note, we are on the cusp of making a significant decision to invest in our treasury and other infrastructure platforms to allow us to scale the balance sheet and manage risk as our lines of businesses diversify. We also anticipate other investments to modernize our lending and our origination platforms in the near-term. Our credit profile continues to be strong despite the economic headwinds. 90-day delinquencies were $44 million or 17 basis points of our entire portfolio, compared to $47 million in the same period last year. As of December 31, 2022, the total allowance for losses were $17.2 million, which reflects an $800,000 provision compared to year end 2021 and this was primarily due to the deterioration of a single agricultural storage and processing loan. Turning to capital now, Farmer Mac's $1.3 billion of core capital as of December 31, 2022, exceeded our statutory requirement by $517 million or 64%. Core capital increased from year end 2021, primarily due to an increase in retained earnings. Our tier one capital ratio improved to 14.9% as of December 31, 2022 from 14.8% as of yearend 2021. And this was largely due to strong earnings results and capital relief that we obtained through our second securitization transaction. And these factors were partially offset by growth in program assets. Maintaining consistent credit standards and strong level of capital is a fundamental part of our long-term strategy to support continued growth, deliver lower costs, and ensure the steady execution of our business model. We successfully closed, as Brad noted, our third FARM series securitization transaction yesterday. That transaction was structured around two tranches, a senior guaranteed tranche and a subordinated unguaranteed tranche, both of which were very well received by the market, despite a volatile environment for structured products. This structure mirrors our prior deals and we're encouraged by the demand for agricultural backed securitized product opportunities as these align very well with our mission and thoughts to continued success. The success of this transaction further demonstrates Farmer Mac's capability to diversify long-term funding sources and to develop a conduit that might generate additional revenues, but that can also serve as a source of capital to the agricultural sector. Most importantly, this capability is highly central to our mission, and we expect to return to the market regularly with similar securitized products as we have committed to making this a more programmatic effort in the future to continue to build liquidity for our investors. These products offer investors a new asset class that in a volatile rate environment is not as correlated as other mortgage backed securities, given the nature of prepayment behavior that's associated with agricultural mortgages. As Brad mentioned earlier, we are very pleased to announce a $0.15 increase in our quarterly common stock dividends, bringing us to a total of $1.10 per share for the first quarter of 2023. We believe that our strong earnings and consistent capital positions support this dividend increase. So in summary, our entire team delivered exceptional quarterly results while fulfilling several key strategic objectives. We also delivered on our key metrics that we report to you on each call. We had record core earnings and continued strong credit performance, and all of this resulted in a 16% return on equity and an efficiency ratio of 28.5% exceeding our previously stated target ratios. As we look ahead to 2023, we remain well positioned and more optimistic than ever to deliver on our long-term strategic planned objectives. And with that, Brad, I'll turn it back to you.

Thanks, Aparna. Well, in summary, we're extremely proud of our financial results in 2022 and the progress we have made on our multi-year strategic plan. Our efforts to further diversify our loan portfolio by customer geography and loan type is working. We believe that this drives incremental growth and profitability. Our disciplined asset liability management is a competitive advantage as we navigate the ongoing uncertainty of these markets. And our singular focus on fulfilling our mission efficiently and innovatively has resulted in the steady forward rate of growth in our business through different agricultural economic cycles. This is how we believe we can continue to differentiate ourselves and deliver value to our customers and borrowers and investors. And now operator, I'd like to see if we have any questions from anyone on the line today.

[Operator Instructions] Our first question comes from Bill Ryan from Seaport Research Partners. Please go ahead.

Good morning and thanks for taking my questions. First kind of starting off on the micro level, obviously in the last several quarters you've had a nice increase in the net effective spread, meaning the margin. And on the conference call, you kind of implied that there's been some pricing increases, but that things may be a little bit wider as well based on the funding cost. But could you kind of talk about your outlook for the net effective spread going forward on the business lines? Thank you.

Yes, certainly. And I'm going to ask both Aparna and Zach to weigh in, because our asset liability management in this interest rate environment has been a contributor, but also and you can see this reflected in how we report out our segments, our line of business segments, is the benefits of diversification show up both in the top line growth as well as the bottom line growth because some of these lines of business that have had disproportional increases over the last year are accretive in terms of net effective spread. So why don't I first ask Zach to elaborate a little bit on the lines of business and the spread there, and then Aparna to kind of round it out with the asset liability management part of the story.

Yes, happy to Brad, and then great question, Bill. And, you know, the first thing I want to reiterate is what Brad said in terms of our diversifying business model. If you look at the growth we had across our two lines of business, a significant amount came from renewable energy and telecommunications. And as you can see in our press release, the yields on those new areas of growth are substantially higher than some of our existing businesses -- business lines, which is really attributing to that appreciation of that effective spread. In addition, we highlighted some of the growth we had in Corporate AgFinance which again, when we're focusing on food business and supply chain transactions generally have more accretive net effective spread than historically our foundational lines of business. So the composition of the new areas of growth are really leading to on the business line, higher pricing and higher net effective spread. Every comment I want make is really on our AgVantage product and really that's heavily market driven. So when we work with some of our investment grade counterparties, especially over the last year with significant volatility in the market, that capped out overall credit spreads in the market and us being a relative value player, we were able to take some advantage of the higher spreads in the market as we put on a significant amount of volume in the AgVantage space. So, you know, in summary, a lot of new diversification in our lines of business plus market dynamics in some of our existing products led to the significant growth we had on the asset side.

Yes, and just to weigh in on the net effect to spread as it relates to wider or more beneficial funding costs, I think one thing we continue to reiterate is just how we manage our net effective spreads. So we minimize the volatility, and we really do that by making sure that we are paring off our assets with prudent liability management strategies. One of the phenomenon, and I think we've emphasized this on the call, you know, our quarterly calls as well as on this one, is just the fact that as the nominal rate environment has continued to move up some of the decisions we've made to extend our funding, as well as some of the excess capital that we've raised, has certainly contributed to lowering our funding costs in aggregate, because that's really reinvests and offsets, the rise in the nominal rate environment that could come with trying to raise capital or funding in this particular environment. Now, that said, and your question might be, well, what do you do if rates were to trend back down? Well, this is where our asset liability management really comes into play. We actually offset some of the gains by making sure that we're hedging some of that downside risk, either through extending or turning out some of the excess capital that we have, so that we've locked in some of those higher rates, if you will. And then the other aspect that we really engage in is active derivatives. And then we also buy a series of callable bonds or issue callable bonds that can then reprice down if rates were to go down. So in other words, this is a very, very dynamic process and we work through this in partnership with the business development team as we understand what's coming through the pipeline and what we have in terms of the funding cost. And that's why you see this real consistency within our spreads and we've always anchored to somewhere between 90 to a 100 basis points, but that slight pickup above a 100 basis points, I'll just note, has to do in some part with the rising nominal rate environment.

Okay, thanks for the detailed response on that. And then kind of moving up to a macro level, I know congress is somewhat distracted, and that's probably a generous word right now, but just in relation to the Farm Act, is there any update on that? I know it's, I believe it's up for renewal later this year. And then kind of from a macro level, what would you like to see incorporated into the bill that might enhance your business opportunities?

Yes, bill, you're absolutely correct. And for the benefit of anyone following this, the Farm Bill is something that has to be renewed every five years. It's the only regularly scheduled piece of legislation in Washington. Having said that, there can be continuation, so it's possible that action on it could be delayed into 2024, which Bill we think is a possibility. Having said that, we're very, very actively engaged with key stakeholders on the Hill with other farm credit institutions other financial institutions. So from our standpoint, what's most important to us is that what is in the Farm Bill is a continuation of what's in the Farm Bill that is good for American agricultural predictors. As an example, crop insurance is absolutely key and we want to make sure that that is one example is preserved. For us, there may be a few improvements or changes on the margin. We're not going to get into a discussion of those specifics, because right now the discussions that we're having with other financial institutions, other farm credit institutions, stakeholders on the Hill, is very dynamic. And ultimately it will come down to not only what does Farmer Mac want, but what do other players in the space want, and is there an opportunity to find a good compromise that ultimately is good for American producers and for rural America, that's what our whole focus is.

Okay. Thanks for taking my questions.

Our next question comes from Gary Gordon, a Private Investor. Please go ahead.

For taking the questions. Aparna, you mentioned that you're considering some expansion of the treasury function. You just gave a, like a headline. Maybe you could expand on that and describe what the benefit is for shareholders?

Yes, I'd be happy to Gary. So when I was talking about the treasury function and that's the treasury infrastructure, so all of the platforms end-to-end that support our funding activities, our hedging activities, as well as our cash management, I think this is something that may not be completely apparent, but we transact a lot of cash. We settle cash to the extent that you might see very large institutions do almost $0.5 trillion of cash is actually settled on average. And we really need to make sure that we are upgrading a lot of those systems. I mean, there are a lot of bad actors out there and we've got to make sure that our infrastructure remains pretty updated. The other aspect, of course, is offensive. We want to make sure that as we continue to diversify our lines of business, our funding capabilities from an infrastructure standpoint and our reporting systems and our hedging activities are also moving in lockstep with that, so that we can scale and grow. So it's a good time for us to make those technology investments. So really Gary, you know, boiling it all down, this comes down to a fairly substantial, at least for Farmer Mac, a fairly substantial investment in technology that we'll make over a multi-year period. So this will be a two to three-year implementation cycle. And really we are looking and evaluating a few different options in terms of who we might bring on to help us as a partner really execute on this. So more to come on that, but as I said, we're really on the cusp of making that decision. And it will generate some temporary surge in our operating expenses, at least over the next 12 to 24 months, so you'll definitely see that.

Okay, thanks. Also, it sounds like there was a charge-off this quarter on a storage facility, you said, maybe you could describe that a little?

So there really wasn't a charge-off per se. It was, you know, I would say that it was really just an increase in allowance that was – that's really related to one particular borrower that we're continuing to monitor. So there has been no charge-off report.

Okay, so no charge-off. Okay. Lastly you, Brad, mentioned about the record farm land values and very strong, and I think you said record farmer incomes. How does that play out ultimately to growth in agricultural debt?

Yes, Gary, it's a very interesting question, because on one hand, record farm income tends to increase net liquidity across rural America. What -- the pattern that we have seen is that many farmers will replace equipment, upgrade equipment, make additional capital investment before paying down debt. So our amount of prepays actually slowed in the back half of 2022. But very recently it's picked up just a little bit. We're trying to understand if that's because of that increased liquidity in rural America or there are other factors at work. But there's no question that there are quite a large universe of parties interested and investing in American agricultural productive real estate. And so the supply demand equation for farmland is very favorable to sellers. And one of the reasons that there is so much interest is because if you think about farmland as on kind of a 50-year investment horizon, there are a lot of reasons to feel extremely bullish about American agriculture in the long run, we have a very good climate. We have the best transportation systems, best body of law, best financial institutions. We have a reasonable government framework for supporting agriculture. It all leads up to many investors to conclude that, American agricultural farmland represents a very, very good long-term investment. So, yes farmland is subject to valuations that are a function of near-term cash flows, net cash flows and net income, but there's also this longer term component. So we see continuing support for values for American farmland. And what it means for us is that we think actually 2023 will be a pretty steady year for our Farm & Ranch program, which tapered down a bit with interest rates running up during the back half to 2022. But as I commented, we're optimistic that it will be stable to increasing as more farmers start making more capital investment in 2023. Zach, I don't know if you'd like to add any additional color to that.

I think the biggest going forward is really…

No, I think Gary, the biggest impact going forward is the, the increase in interest rates and how that will impact the farmer or producer who wanted to take on more debt in the medium term. But to Brad, as Brad said, the supply demand dynamics and the limited availability of land really provides an opportunity for farmers to take advantage of potentially medium term or shorter-term debt in 2023 as they manage the rate environment.

Okay, thanks a lot.

The next question comes from Brendan McCarthy from Sidoti. Please go ahead.

Great, thank you. I was wondering if you could talk about the demand dynamics within the renewable space. I imagine it's pretty diverse considering, from an ESG perspective. So I was just kind of wondering if you could talk about, the buying opportunities with those bonds.

Certainly, project financing for renewable energy projects is primarily done at the inception of the project. Most project financing is structured, so that amortizes over the life of the investment, usually over 15, 20, 25 years. So, there's not a lot of refinancing going on there. It's primarily new projects. And what is driving new renewable energy projects, including solar and wind in rural markets, which is our focus is the fact that the price of the capital investment, the cost of the capital investment for solar and wind projects has plummeted to the point where on a straight kilowatt hour to kilowatt hour basis, it's very competitive with thermal sources of energy. And so there are, in addition to that, there are tailwinds, for example, from the Inflation Reduction Act, and others encourage more renewable energy, but the fundamentals, the economics pretty well stand on their own. So we acknowledging what's been going on over the last 10 years, continual trend in the reduction of the cost of these sources of energy, and the fact that this capital investment is being made in rural markets many times on leased or purchase land agricultural land, and in rural communities, all part of our mission of supporting the economic development and economic opportunities in rural America makes perfect sense for us to do this as well as the credit risk profile and the funding requirements for these long-term amortizing projects. So yes, to your point there is, you mentioned ESG, but most importantly it's the Economics and Inflation Reduction Act that are driving what we think will be an increase in investment opportunity, lending opportunity for renewable energy project finance. And we've committed some additional resources, some additional people to further develop that opportunity for us in 2023. So, I think we mentioned earlier that we are quite optimistic that we can increase our growth rate and overall level of financing activity, purchase loans for project financing for renewable energy projects.

Great, thank you. And then a separate question, you mentioned farm values on the, on an uptrend, what's your outlook in that space? I think, when do you expect to see higher interest rates really, you know, maybe weigh on that outlook?

Well, I think, there has -- higher interest rates have moderated on that somewhat. There's an interesting mix amongst purchasers of farmland between individual farmers who may be, are eyeing an adjacent farm where it's viewed as a 50-year, a 100-year multi-generational investment opportunity. And then more institutional investors who maybe look at it much more like on a traditional cap rate basis. But there's enough continued interest that we see continued support for land prices, even with rising interest rates. And so we do not contemplate in any of our forecast right now that there would be a real drop in land values and there could be some flatness, but overall we think that it will continue to be, reflect moderate growth over the next couple years.

Great, thank you.

Our next question comes from DeForest Hinman from a Private Investor. Please go ahead.

Hey, thanks. I'm going to ask some couple questions and I have some comments too. Just the first quick one, how do you guys calculate your return on equity currently? Like what was the return on equity for 2022?

Yes, sure. The way we calculate it is just we look at our regulatory capital, which is about $1.3 billion, and that tends to be, the sum total of, you know, what hits our Tier 1 capital ratio and that goes in the denominator. And then in the numerator, we actually strip out our GAAP funding costs. So we don't really account for anything that results from fluctuations and derivatives and hedging activities. So we really just look at our core earnings. So that's really how we get to our return on equity or return on regulatory capital. So it's really just our core earnings divided by our total regulatory capital. And then if we want to look at it over our common equity, then we just strip out the effect of anything that's related to preferred or other sources of capital as we look at it purely on just the base of common equity that's outstanding.

And what's that final number?

So for 2022, we ended at 16%. And, we have a target where we, we try to really hover anywhere in that, 14% to 15% range. And we really try to manage that in conjunction with our net effective spreads of which we've I think said, we try to manage that anywhere between 90 to a 100 basis points. So that's really our top line revenue. Couple that with our efficiency ratio. So those are the three key metrics that we persistently pay attention to, efficiency ratio being under 30%. So if all of this sort of clocks in at a certain pace, then we should hit our overall metrics for return on equity.

Okay. So, having said that, this is more of the comment part, but it is so fantastic job, everybody. I mean, just, really great performance over the last few years, phenomenal dividend growth rate, really attractive ROE. I think you're doing something in the financial space a lot of other people can't even touch. You're also a GSE, so you have funding privilege and in your managing your spreads and your underwriting has been incredibly strong. It just seems like your share price is far too low and you don't get any respect for what you're doing. So I would say, keep up the good work, and this is for the sell side analysts on the call, if they go back in time, GSE evaluations, pre-financial crisis were far in excess of where your share prices is currently valued at. So I would say, you're doing a great job. Keep up the good work. Question now is, can you give us a little bit more color on securitization? You announced that before the call. Can you talk about, how many people were buying that securitization versus some of the previous securitizations? Are we seeing a diversification among those buyers in terms of, are they insurance companies, bond funds, who's buying? And then, was that deal oversubscribed? And then I have some additional questions as well.

Yes, DeForest, I'll let Aparna get into the securitization buyers which is again a very, very positive story. But going back to your first point, I mean, we completely agree and a couple of follow on points. Our performance is remarkably consistent. I challenge anyone to look at a more consistent performance, both in terms of growth and absolute levels of earnings that 15%, 16% after tax ROE, you can look at it over a many year period and see very little fluctuation. So, and the comparison to these pre-financial pandemic I think has been an interesting one, but I would note that there were some behaviors, some actions with other GSPs before the financial crisis that really got them into lot of trouble. And at Farmer Mac we have been remarkably free of any political pressure to do anything other than just doing what we have been doing in terms of fulfilling our mission and maintaining very, very sound and safe practices and fulfilling that mission. So I would argue that the consistency, the stability, really is without peer, without comparison. But with that, let me turn it to Aparna to talk a bit about the market for these securitizations and one point though before I do, DeForest, and that is that if you look at the period when prior to our announcement on our three securitizations, that was the time when investors, mark different types of investors were taking variable look at Farmer Mac from a C-Cclass stocks standpoint as well. And so we believe that this is something that has increased our general exposure to a larger group of investors. But with that, Aparna?

Yes, no, thank you, DeForest and I want to echo Brad for your very kind comments, very, very proud of all of our results. Just on your question regarding securitization and the investors, I think you had sort of a two-part question. One was just around the type and diversity of investors and I'll just say to that, just a few data points. Obviously, we can't reveal any specific investors, but I'll just give you a few points. We brought in about seven new investors into the program. We had a number of investors who were consistent buyers across all three deals. And we've also, relative to the previous issuances, increased the overall investor count in the book. So just from a breadth and depth, we've increased our investor count. We were certainly oversubscribed as well in both tranches. I'd say, just anecdotally as well, on E tranche despite a lot of the volatility in the market a little bit more of a return to risk on sentiment with regard to credit. Our B tranche investors really did not need any selling on the name, as Brad noted, certainly to give us broader exposure about the company. But the first two deals, we really spent a lot of time talking about Farmer Mac. I mean I think between Brad and me, we did 17 or 18 calls over a three-day period. This time, we did not need to sell the company at all. A lot of it came down due to the granularity of the deal and the transaction itself. The reason I mentioned that is, it just starts to highlight just the programmatic nature of these deals, but also the familiarity of investors with who we are a collateral and the company overall. And then I think there was a second aspect to your question, which is how often one of the constraining factor is obviously, market conditions as well as pipeline, but we've actually committed to making this the more programmatic set of issuances. And so, we do hope to return to the market again at some point this year.

Okay. That's helpful. And then I just want to help people understand this opportunity within the renewable space, because I found this very intriguing when you started talking about it in the past. There's a public company out there, it's called Hannon Armstrong, and they have some lending programs that appear to be into the renewable space and I believe they structure their deals, where they're doing the lending, but they also want to see a long-term power purchase arrangement. And they have their slide deck available and they show that they're lending money in 2022 at a rate of 7.5% and their funding costs are 4.3%. So, the first question is, is this the type of product we're trying to lend on within the renewable space? And then how do our metrics look versus something like they've laid out? Because if they're saying they're lending money at 7.5% and they're borrowing at 4.3% and they're generating attractive returns, and they're growing their renewable energy lending portfolio, it would seem, this is my very simplistic view that you would have an extreme funding advantage and your cost of lending would be significantly lower, and this $200 some-odd million renewable loan book that you have currently should be able to grow at a phenomenal rate. So, I'm going to pause and hopefully, we can get some more color here.

Yes, we'd be happy to. And I spent -- in my 40-plus year career I've gone back and forth between agriculture and electric power and so, I've got a lot of familiarity with this. And in fact, I know Hannon Armstrong, and know and respect Jeff Eckel a great deal, Susan Nickey, who is running those programs. These are people who are very, very capable and have made a very good niche for themselves, so nothing but respect. Where we're playing is quite similar to that part of Hannon Armstrong's business, but it's also traditional project financing for renewable energy projects that over the years has been dominated by Japanese and European banks operating in the United States. U.S. banks just haven't done that much of this and part of it is because of funding. And that's why we think that we can carve out a very, very nice business, both on secondaries with the large Japanese and European players, and also on primaries originated by other seller servicers in kind of the midmarket part of where we can operate nationally, but more efficiently than the relatively few number of mid-market players. So going to your question about credit metrics, this is a pretty tried and proven path in project finance for renewable energy projects. If you want to dig into an abundance of underwriting history, as well as guidelines from Moody's and S&P, that's right where Farmer Mac is. These are projects where there is a long-term underlying power purchase agreement, where the debt is typically amortizing long-term debt over a power purchase agreement. Sometimes there's a balloon, but oftentimes is fully amortizing over it, where there are debt service coverage ratios typically in the 1.25 to 1.4 range, where there's sculptinization, given the seasonality of the cash flows coming from solar wind projects where their six-month debt service reserves, very, very tried and proven underwriting metrics and that's what we're doing at Farmer Mac. This typically is a project finance credit that will rate out at kind of the BBB-, BB+ sort of equivalent, again exactly where Farmer Mac is. So we are doing something where there's been a lot of market experience and discipline developed over the years. And because as you point out, our funding advantages, this is something that we think is a natural for us. Now in terms of spread, taking your citation of Hannon Armstrong at 7.5%, funding at 4.5%, it's probably a little bit different for us given the space that we're playing in, but I think when you look at our segment reporting, you can get an idea. The coupons on these loans might be in the neighborhood of comparable term treasuries plus 200 to 300, occasionally a little bit more, and you can back out of our cost of funds from that and kind of get to anticipated net spread. But to Zach's prior point, I think we would emphasize that this is yet another segment that is accretive to our overall returns at Farmer Mac.

Okay. And then maybe just a growth piece, I mean you're steering the ship here. Is this a multibillion-dollar portfolio exposure in a couple of years? I mean, where should we expect this to go?

Yes, I think we've highlighted that we put on, on a percentage basis, we put on a large amount in 2022. We've committed more resources to this in 2023. So, we would hope that in 2023, 2024, it might be a mid-nine figure sort of volume number. Looking a few years out, it very easily could get to that kind of 10-figure number. I think we have stated on prior calls that this is a market where the market is available to us and might be in the neighborhood of $8 billion to $10 billion a year for us to achieve a 10% market share over some years doesn't seem like an unreasonable goal.

Okay. That's incredibly helpful. I hope everyone listens closely to what you just said. And then the last question would just be a two part. What's the current employee headcount? And what's the planned headcount additions in 2023? Thank you for all the answers.

Sure. We finished the year with I think it's 158 employees since the beginning of the year, we may have added a few. We actually, I think, on a full budget basis for 2022 had 170, 170 and change for year-end. We had a little bit more attrition, which is by corporate standards is extremely still very low. We also won interest rate volatility set in, in the second quarter of 2022. We took a go-slow approach on some hires. So, I think we ended the year a little bit below what we planned for 2023, through our Board meeting went through our budgeting process. And I think over the year, we might add about a 10% headcount to where we are today.

All right, thank you.

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

Good. Well, thank you all very much for participating in this. I hope that we have been able to convey to you our real delight with our 2022 performance as well as why we remain so optimistic about the future of Farmer Mac. We say it over and over again, but the principles that we use, the discipline that we use for our asset liability management, the focus that we have on rural America in these market segments and sub-segments, it's what we do and what we're very, very excited to do. And because of that, we've become very good at doing it and that's why we're very optimistic about the future. DeForest raised some very good points about the fundamentals and why we are optimistic and should be optimistic. And again, we hope we've been able to communicate that to you today. I just want to conclude by again saying just how incredibly proud I am of the 158 employees of Farmer Mac and their commitment to our mission, their extreme expertise and specialization, and how that contributes to these great results. And we look forward to speaking with you again very soon. In the meantime, if you have any follow-up questions, please reach out to Jalpa and with that, we wish you a very good day. Thank you.

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