Farmland Partners Inc. (FPI) Q1 2016 Earnings Report, Transcript and Summary

Hello and welcome to the Farmland Partners Incorporated First Quarter 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. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Paul Pittman, Chairman and CEO. Please go ahead, sir.

Thank you. Good morning, and welcome to Farmland Partners' first quarter 2016 earnings conference call and webcast. We truly appreciate you taking the time to join us for these calls, because we see them as a very important opportunity to share with you our thinking and our strategy in a format that is less formal and more interactive than public filings and press releases. Please refer to the Investor Relations section of our Web site, www.farmlandpartners.com for our first quarter earnings call supplement presentation, which I will be speaking to later in this call. The link for the presentation is directly below the webcast link and is also posted under our Investor Presentation section on our website. With me this morning is Luca Fabbri, the company’s Chief Financial Officer. I will now turn it over to Luca for some customary preliminary remarks. Luca?

Thank you, Paul. First and foremost, I would like to also welcome you to this conference call and webcast, and thank you for joining us. The press release announcing our first quarter earnings was distributed yesterday evening. A replay of this call will be available shortly after the conclusion of the call through May 24, 2016. The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 10, 2016, and have not been updated subsequent to this initial earnings call. During this call, we will make forward-looking statements including statements related to the future performance of our portfolio, our identified acquisitions and farm properties under evaluation, impact of acquisitions and financing activities, as well as comments on our outlook for our business, trends in the broader agricultural market. We also will discuss certain non-GAAP financial measures including, but not limited to FFO, adjusted FFO, EBITDA, and adjusted EBITDA. Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the company's press release announcing first quarter earnings, which is available on our Web site, www.farmlandpartners.com. 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 or furnished to the SEC. I would now like to turn the call back to our Executive Chairman, President and Chief Executive Officer, Paul Pittman. Paul back to you.

Thanks, Luca. So I'm going to begin by referring to this supplemental document that we have filed so to everyone on the call can have that in front of them. We have finished yet another very strong and great quarter. The key things going on at the company are that we are beginning to really see the importance of returns to our growing scale and size the fundamental strategy of investing in multiple of diverse locations and many different crops is coming through in terms of the revenues of the company and the growth and operating leverage is very-very powerful. So couple of key statistics on page number 3 of the earnings supplement. So do you went to the end of the first quarter of 2015, we have around 49,000 acres at the end of the first quarter in 2016 107,000 acres, more than doubling. The farms that we owned went from 93 year-over-year to 255. The tenants have gone from about approximately 44 to 70. Our employees have grown from 8 to 13 and the close value of our portfolio is based on the purchase prices of that portfolio went from $209 million to $580 million. So on key operating statistics we are growing very-very rapidly and we would anticipate that this growth will continue into the future. Turning over Page 4, which is a look at the similar growth story but from a financial point of view. We've reported GAAP operating revenues, have grown from 2.1 million in the quarter to 4.1 million in the quarter, so a huge 123% growth. Crop year adjusted revenue which feel free to ask before the explanation if you don’t understand this in the question and answer, but it's a more fair representation in our view of revenues. Crop year adjusted revenues went from 2.2 million up a 167% to 5.7 million. AFFO -- over 400% growth in AFFO. Adjusted EBITDA 224% growth, again some of the cost side we've got a depreciation and depletion and property operating expenses went up a 103% that's what you would expect because that's going to grow at the same pace as the portfolio overall more or less and then the parts of the cost structure we really can't control are acquisitions and diligence cost and G&A while revenues again were growing a 167%, we grew the acquisitions and diligence and G&A and legal and accounting only 77%. So the story here really is operating leverage and the effect of that as we continue to increase our scale. I believe that that relationship between our cost side and our revenue side and the differential in growth between those two things that is a trend that we could maintain for several more years if we keep growing this portfolio. Looking at AFFO per share which is on Page 5, we grew from $0.04 a share to $0.11 a share and that's a 186% growth and then also on that page of course is the increase in our share count. Moving on to Page 6 which is a little more of a granular analysis of the specific thing we do with the company but I felt it was important to cover today, is a really -- because a lot of people ask us how are we in a somewhat challenging farm economy maintaining rent growth and profitability on assets we already own. And what this next couple of pages does is it looks at the improvements that we make to our properties after we own them. We do not do a lot of development, meaning we don't buy a farm that isn't a farm and take the zero cash flow for a few years or even negative cash flow to turn it around, because we think that there's on a risk adjusted basis it's hard to get a fair return on doing that. However we do make incremental improvements to farms that we own. So since the beginning of -- since we went public we have made very significant improvements both what we completed and what we have in process is a little over $10 million of investment in the individual farms and you see each of these projects listed on this page and they're every -- they're generally drainage tiles, grain bins, irrigation improvements and there are few other types of improvements, but those are the three major ones that make up the overwhelming majority of what we've done. You can see the individual amounts we invested and all I really want to focus here for a second is the estimated return. So when we make a capital improvement to a farm and we will make virtually any capital improvement that a farmer asks us to make assuming that he will pay an increased rent for that, pays us fairly for making those improvements. So what you can see here is, take this very first project just for example, the Abraham Farm in Illinois. So we made a modest investment there of about $75,000 to put drainage tile into that farm. This is Illinois of course where cap rates are challenging on many farms and we were able to get a 5% return on that drainage tile. 5% is not a huge number but it's a very fair number when you think about the fact that drainage tile has an expected life of something between 40 and 50 years if not longer. So what we were able to do was make an increase in the rent due to this improvement and it increases the overall cap rate on the farm. Moving kind of just down the page for a second, you know you will see irrigation improvements in South Carolina, say 10 mile or maiden down. Those are very significant irrigation improvements we have made significant enhancements to the total yield capability of those farms and the farmer would say up to 6% return on those investments in irrigation. Importantly though those investments if we were to sell that farm probably would lead to a material enhancement in the sales price of the farm, something in the neighborhood of $1500 of acre of additional sales price over what we've put into those forms on a cost basis because they're now irrigated farms. It's gone to the next stage, these are sort of a projects that we have in process. There's a couple of projects here with very -- I'm on Page 7 if you're following along, there's couple of projects here with you know really outstanding returns to the incremental investment we made. So you have 25%, 36%, 35 %. So I want to draw those out and explain what is going on there for a second. And then also you'll see further down the list 10 mile and maiden down we added drainage tile after we had already irrigated these farms and so I want to talk about those for just a moment. So what's going on with Long Prairie, Garrett [ph] and Stonington Bath, these improvements -- these farms have allowed us to get -- these farms are all operated under a revenue share program and we were able to -- because of these investments have two things happen that substantially increase the rental income that we'll get from these farms. The first is because we improve the farm, the farmer agreed to give us a bigger share of the revenue. So for example it was 25% share of revenue on these farms, it’s now 27.5% and you get that sort of bump in share of the revenue. But the real power that these improvements did is using Stonington Bath as an example, we took a farm that was dry land farm, meaning it had a revenue expectations that might have been $300 an acre $400 an acre at best, converted it to an irrigated farm where we now have revenue expectation that is more like $800 to $1000 an acre. So you got two effect leading the big returns on those projects, effect number one is increasing the share you got from the farmer which he agrees to give you because you’ve made more stable and better farm for him lowered his risk. But you have also made a material enhancement in the yield on entire farm therefore having really powerful returns to what are frankly modest amounts of incremental investment. Turning on down to page for second, not everything is always good news on the improvement front, look at Bo-Goodwater, its Nebraska farm. Here we have a zero return on this project and the reason is what that really is, is the replacement of a failed well. So this farmer in fairness, so the farmer had been renting an irrigated farm from us something occurred that frankly made the well failed completely we had the re-drill a new well, so we can't really up the rent on the farmer for putting it back in the condition that he thought he had it when he rented it. So occasionally and this was pretty much a complete list we’ve shown here. Occasionally we will have one where we get no return. So I wanted to put it in there for the sake of completeness. But generally speaking when we make these improvements we make a material increase in the REITs revenue from these farms. 10 mile and maiden down again, these farms are -- and any of you investors on the phone if you would like to visit them with us someday feel free to call us. We bought these farms now about a year and half or so ago and we have made huge improvements to these farms. We bought them on August 1, 2015. I am not quite sure they all stared a year ago. These farms are very, very special in terms of their quality by South Carolina standards we have now irrigated them and drained them, they are probably some of the most, potentially most productive farms in the Carolinas. The valuation of these farms which doesn’t really show up in the way all our -- we record properties that are acquisition cost, incredible increase in the valuation these farms due to the enhancements to their yield potential through drain and irrigation. Truly beautiful and outstanding farms at this point. So with that I'll pass it back over to Luca to go though some of the financial highlights for the quarter and then of course we will have the Q&A session after that. Luca.

Thank you Paul. In the first quarter 2016 we closed on 125 farms in five states totally nearly 33,000 acres and that includes our largest Paris, Illinois transaction totally by South over 22,100 acres as well as 7,400 acre contiguous farm in Louisiana. We also put under contract over 1,000 additional acres. Given our acquisition activity the first quarter saw also significant activity on the debt financing side, we entered into $53 million bridge loan with an affiliate of MSD partners whose terms included one-time 4% up from interest charge totaling $200,020,000 in addition to ongoing interest of the rate of 3% over the one-month LIBOR. The bridge loan was repaid within quarter also in the first quarter we entered into a loan agreement with MetLife though this agreement we have since closed on three term loans totaling $127 million of which $106 million closed within the first quarter with interest rates ranging from 2.38% to 2.66% as of March 31. The MetLife loans have a tenure term although interest rates will be adjusted during the term in our currently packed to either the three-month LIBOR or the three year U.S. treasury. Proceeds at the MetLife loans have been used to repay that we had outstanding with MSD and The First U.S. Bank and to close new acquisitions. As of March 31 the average interest rate on outstanding debt was 2.74%. Now let me turn to our first quarter 2016 financial results. As I cover some of the key highlights please refer to our earnings press release for more details. For the first quarter of 2016 we recorded rental income of $4.4 million and a net loss of $1.9 million. We received $10.7 million in cash rents and all our properties are either rented or under contract with the expectation that they will generate rent revenues for the full fiscal year after closing. Like many other reeds we look at certain non-GAAP measures particularly adjusted funds from operations or AFFO as additional measures of our performance. We calculate AFFO, funds from operations consistent with the definition provided by the National Association of Real Estate Investment Trusts. The key adjustments we make to FFO to arrive at AFFO are to recognize revenue in the calendar year in which the cash rental payment was actually received and to exclude non-cash expenses such as stock compensation and certain acquisition-related expenses. For the first quarter of AFFO was 1.8 million and on a diluted weighted average basis AFFO per share was $0.11. When we calculate per share non-GAAP measures on a diluted weighted average basis, we include units in our operating partnership, which is our main operating subsidiary, because of their one-to-one convertibility into publicly traded shares. On that basis, our fully diluted weighted average share count was 17,029,623 for the first quarter. As of March 31, 2016, we had 18,858,312 shares outstanding on a fully diluted basis. This concludes my remarks on our operating performance for the first quarter 2016. Thank you for your time this morning and your interest in Farmland Partners. Operator, we would like to begin the question-and-answer session.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Dave Rodgers of Baird. Please go ahead.

Just wanted to go through a couple of questions if we could, I guess maybe one can you talk a little bit about the round negotiations that you're seeing and I know that you don't have any rollover but in terms of the rent negotiation that you see when you looking to buy assets and maybe a part of that talk about the percentage kind of sale leases back transactions versus third party transaction you're seeing in kind of the tone and those discussions around rent levels and our farmers more sensitive to that today?

Absolutely and this is for everybody's benefit, Luca and I are actually in different locations this morning so maybe a little awkward, Luca if I want to pass a question off to you I will. So I’m terms of kind of the broad question that you're asking, we're seeing cap rates generally speaking creep up slightly. So in other words what's happening out there is you're getting -- because of the challenging farm economy of the operating level, you're getting pressured in a modest amount on rents and on land prices. But what we're seeing and this is not widespread but is anecdotal and we're taking advantage of it, we're seeing the price of a farm come down faster than we're seeing the rents come down, so let me amplify that for a minute. So what you'll see is where there are is a death in the family or a state planning event that leads to sell of the farm, the farmer themselves are not as aggressive acquirers as they used to be. Two years ago the farmers drove this market. Today if there is a farmer rise next door and farmer really wants it, he will buy it and prices achieved will frankly be as high as they were a couple of years ago. But if the farm does not have a natural farmer buyer literally right next door, it may struggle a little bit because farmers are preserving their cash. So we've been able to pick up farms and then turnaround and rent them for in the neighborhood of maybe 50 to as much as 100 basis points higher rentals than we had been getting two years ago when everything was frankly stronger in the general farm economy. What that means is that a little bit of pain in the marketplace is actually creating opportunities for us and as long as that pain doesn't get too high you don’t get kind of broad brush declines in evaluation but on a rifle shot basis you can get better individual deals and that's where we are today. As a word of caution Dave, I'll just be clear if you continue to see a really difficult operating environment for another couple of years, it will get challenging and frankly maybe cause some real price declines in farm, nobody had really seen them yet and we think that -- but we don't think that will happen, but it's always useful to keep in back of your mind.

And given some of what you've just said, can you talk about kind of and I missed some of the earliest part of the call, I apologize, if you talked about it. Can you talk about the acquisition pipeline and maybe where it is and what you're seeing as a mix between permanent and rogue crops in there?

So what's some -- so in terms of the acquisition pipeline has as always it's very-very strong, there is no -- this is such a big market with so few institutional participants of any scale that there is literally endless opportunity of acquisitions and we have many. As far as the balance, obviously all of the key regions we're in today continue to be good and strong for us. We as always are very focused on the Southeast and the Carolina as we think there is good value and good cap rates there, so we like doing transactions in that region probably frankly better than anywhere else, but the rest of the country. The country the Delta that Corn Belt with high points all good regions for us. What we're seeing happen in California and we don’t own any assets in California. Is there has been a significant decline in the price of some of the key commodities in California, almonds in particular since early last fall to today. That is going to drive in our view a material decrease in the valuations of properties on the branches and particular in the Central Valley of California and that's going to create some buying opportunities. So we are beginning to explore those opportunities as they come along, we felt that the pricing and the water risk 12 months ago was something we didn’t wanted to take on. The water risk issues despite a relatively wet winter still fundamentally there, but the pricing is lot more sensible so we are delegating and looking at those properties, actively have no idea for actually do one, but we do think the times is ripe for making those investments if we find the good asset with manageable water risk.

Thanks for that last, probably dovetails into my last question which is probably for Luca, but can you talk about where your capital availability stand today please?

Yes, I'll go ahead and take that. With the acquisitions we are internally having the pipeline we frankly don’t have a lot of dry powder left that does not mean that we are going to do an offering or anything specifically of that nature, we are not sure. Our strategy has been more effective as you all seen, it's more -- we are way more effective and frankly a way happier when we can do acquisitions with our currency and that would be kind of our chosen directions. Obviously the returns to scale that I outlined in the beginning of the conference call are like powerful so we would like to keep growing, but we are more or less approaching fully invested at this point in time. So we are not in a situation where major additional acquisitions can be done unless we do them for equity.

Okay, great. Thanks guys.

[Operator Instructions] Our next question comes from Jack Johnson, a Private Investor. Please go ahead.

My question is about dividend structure, expect the dividend 12 ¾ [ph] since to remain same and also I'd like to ask about -- can there be in terms ever be qualifying dividend for tax purposes qualified dividend or return of the capital like long-term short-term capital gain that was my question?

Yes, so on the first part of your question and Luca I'm going to turn the second part of that question over to you. But on the first part of this question the answer is we would likely to keep our dividend where it is hopefully we can raise it overtime, but that would be our strategy and our outlook as this point in time is to maintain the dividend where it is and will see how the rest of the year develops. Luca if you can answer the second question, do and maybe you can off top of your head.

I don’t have our tax people here in the room with me but fundamentally the qualified nature of the dividend income really depends on the specific circumstances of the individual investor.

I see.

I would encourage you to feel free to call the company and will help you think through that if you would like, but it is the little bit investor by investors specific.

Okay, I'm just interested in the qualified dividends aspect for the regional for individual federal tax purposes. That's all.

Okay, great.

Yes and specifically if that concerns the income -- the portion of the dividend that reflects income our taxable reach subsidiaries right there which is a [indiscernible] the taxable, corporation. Right now we that taxable with subsidiary is relatively very, very small scale just as a reminder it directly farms just a few acres there are a more of a way for us to really be in touch with the farming economy better rather than to specifically generate income as I said, as of this point. So there is really not very significant qualified portion of the dividend income at this point in that respect.

Okay also, you have the Annual Meeting on May 25th?

That is correct. Yes. 8am at the company's offices in Denver.

On May 25th. Is that open for individual investors.

Absolutely, any public company shareholders meeting any shareholder can participate.

Oh okay, May 25th, 8 am, thank you.

[Operator Instructions] our next question comes from Rob Stevenson of Janney, please go ahead.

Paul just to follow up on your comments around Dave's question about essentially dry powder. You know the stock is not a level where you want it to be and obviously below the sort of 1,255, 52 weeks high et cetera and you don't really want to use that as a currency. Do you think about just basically operating the current portfolio or does it lead you down the path of trying to explore joint venture or partner opportunities as a way to access equity capital, a different type of equity capital at perhaps a cheaper rate?

Well obviously we'll explore every alternative at all points in time right. The goal here is to make as much money for shareholders as we possibly can and obviously as you'll know I'm one of the major shareholders. So our perspective on this and it’s the same as it’s frankly always been is issuing equity of any type below the asset value is always difficult, however if you have investments with accretive return scenarios that you can execute on and give you higher cash flows on potential for higher dividends and so on and so forth, it's not an absolute binary question you'd have to ask. We like to be very-very disciplined in how we do this, we have created a company of significant enough scale that we don't have to raise capital, but you saw the numbers that I outlined on what the effect of growth is on the bottom line. So it's you know it’s really, there's no easy answer here but one thing that is kind of a universal truth is that the fees and expenses associated with equity raising through acquisition transactions are way-way lower than the fees and expenses associated with doing any kind of equity offering through the investment banks. So we have a huge preference for using our currency in an acquisition as opposed to returning to the market. That's you know we've got all of the bells and whistles you would expect of a public company at this point in time even though we're small, we have shelf registration statement and all of those avenues of capital raising that gives us. We explore from time to time various joint venture structures with people where we would manage money alongside the public company in some sort of sidecar structure, we've got conversations of that nature going on all the time, but it's got to be fair to the public shareholders. Whatever it is we do of that nature can't be as I jokingly call it, a heads they win, tails we lose approach. And sometimes it's difficult to get those deals put together in a way that's fundamentally fair to the public shareholders. So we're exploring every avenue keeping our cost of capital low is incredibly important to us but continuing to grow the company is also important so I don't -- there is no clear answer there's no silver bullet there for what we’ll do.

Okay and then just lastly for the crops and locations that you really want to own or to acquire at this point what would you say you know pricing relative to a year ago is for those farms today, are we slightly up slightly down is there been more of a disruption for the stuff that you know would really like to add to the portfolio or is there, the higher quality stuff not really moved over the last 12 months.

Well it's different it's different from each region, so when you kind of think about the major regions you're seeing some sort of somewhat of a price resetting on the West Coast where we don't own assets today but hope to, obviously since we're not invested in that market yet a decrease in price on those assets would be a good thing for us. If you go to the core of the Midwest the Corn Belt there's been you know some level of price pressure that's a very corn and soybean intensive region, although it's not frankly all that significant but certainly modestly down. That we could think that that's kind of gradual slow decline in values in that region will continue and until the farm economy turns around, but it's not going to be any kind of violent negative downward trend. You know the Carolinas are actually holding up pretty well. I think in prior phone calls I talked a lot about the positive thesis, meaning the profit above or the price above Chicago border of trade for most major commodities out in the Southeast, that trend continues we're able to make these major improvements to those farms and that region is doing very strong for us, continue to acquire there. The Delta, the Delta's a very unusual region it's got a lot of crop variety much more than the Midwest. So if you're seeing for the profit of better properties we assume valuations hold up pretty well. That sort of quality differential is significant in the market place meaning the very best property sort of say top quartile and above, you are seeing very little decline at the valuation of those farms. When you get into the bottom quartile you are seeing frankly quite a bit of decline we don’t own than in the bottom quartile or at least we hopefully don’t. When that middle two cortiles slightly downward pressure on those farms would be my overall naturalized judgment, but again this is market if you look back to the 1980s for example which was a truly tough time in the farmer time were nowhere close to that sort event now. But you saw at approximately 5% decline in farmland and for several years in a row you never did really go off the cliff, it's just kind grounds down slowly and that’s frankly one of benefits for the assets class is that it's just all about crude demand and you just don’t give real violent changes like you do another real estate asset.

Our next question comes from Daniel Altscher of FJ Capital. Please go ahead.

I was wondering if you could maybe just give an update on what you think the run rate NOI looks like right now, especially considering the really big transformational acquisition that was done through within the quarter with the Paris firm.

Look I don’t know if I can do it on an NOI basis, I’ll do it on a rental rate basis. Our run rate as of now if we didn’t do any further acquisition we would be running a right around $23 million of revenue for the year. We’ve got a few acquisition in pipeline that ought to take that up slightly and select the pretty significant increase that’s where we come out for the year compared to year end last year at the -- not as doubling but a significant jump of course. And so we feel pretty good about the consecutive increase in revenue and all the benefits that come from that.

Okay and Paul I want to hold to a number, but I just want to clarify the $23 million run rate that’s cash number not just a GAAP number right?

Yes, that’s exactly right. I am speaking in terms of what we would call croppy year adjusted revenue.

Ok and then just one other quick one since you did mentioned or I guess the discussion you brought up around capital and NAV, any commentary on -- we are pressing this thing right now, do you have an update or sort of committee of range of what NAV looks like end of the quarter for company?

We always say, not that it’s changed overtime, but our view is the net asset value the company is between 12 and 12.50, many of the investors ask me this from time to time and we always frankly we will speak as open earlier as we can about it. That the range that the Walls Street analyst have is a little broader, I think little over 11.50 and might be one that’s out there 13 or so. So we are kind of in the middle of that range. NAV is a difficult thing that have appropriate handle on our method of calculation is to take the purchase price of the assets, minus -- plus the cash divided by the shares outstanding. We don’t markup farms in our portfolio that made of materially enhancing value frankly the once where I talked about doing drains and irrigation or probably huge bumps in value, on the other hand I would be certainly we have a formula portfolio in our that’s probably worth a little less than we paid for at this point time. I don’t put a lot of stock in annual appraisals, I think that’s frankly a relatively expensive process for a not a great deal of value, in terms of the result, confidence in the results not because praises are bad, but you have to understand there are forced to perform a certain process and their charge is to do a process based on that sort of rules and regulations it is not really answering the question of what farms are worth. It’s answering the question of what farms are work under this varied mechanical valuation approach which has a whole set of errors and better than it automatically. So we did -- given that everything we have has been an arm’s length market transaction of some sort in the last two years with an acquisition cost is probably the safest judgment of value. We get out another two to three years and we will major portion of this portfolio has been held for five years operating results more. Given some third party apparels for example make sense, but this idea that you hold something for a year and it’s up 20%, I frankly believe is hogwash, the market is more efficient to that. So our view is we just present NAV the way I said it and we think it's in the range of 12 to 12.50.

And this concludes our question-and-answer session. I would now like to turn the call back over to Paul Pittman for any closing remarks.

Thank you. We continue to appreciate your interest in our company and for any follow-up question, please feel free to contact me via email and we'll try to help answer them. Thank you all for your time today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.