Farmland Partners Inc. (FPI) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Farmland Partners Inc. Q1 Earnings Conference Call. [Operator Instructions] Please also note that this call is being recorded. I would now like to turn the conference over to the CEO and Chairman, Mr. Paul Pittman. Please go ahead, sir.

Thank you. Good morning and welcome to Farmland Partners first quarter 2017 earnings conference call and webcast. We appreciate you taking the time to join us for these calls, but we see them as a very important opportunity to share with you our thinking and our strategy in a format less formal and more interactive than public filings and press releases. Please refer to the Investor Relations sections of our website at farmlandpartners.com for our first quarter 2017 earnings call supplement presentation. We will speak to that presentation later in the call. The link for the presentation is directly below the webcast link and is also posted under the Presentation 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 the call over to Luca for some customary preliminary remarks. Luca?

Thank you, Paul. First and foremost, I would like to also welcome you to this conference call and webcast and thank you for joining us today. The press release announcing our first quarter earnings was distributed yesterday evening. A replay of this call will be available shortly after the conclusion of the call through May 23, 2017. The phone numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 9, 2017 and have not been updated subsequent to the initial earnings call. During this call, we will make forward-looking statements, including statements related to the future performance of our portfolio, our identified acquisitions and farm properties under evaluation, impact of acquisitions and financing activities as well as comments on our outlook for our business, rents and the broader agricultural markets. We also will discuss certain non-GAAP financial measures, including FFO, adjusted FFO, EBITDA and adjusted EBITDA. Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the company’s press release announcing first quarter 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 as of today, May 9, 2017. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the risk factors discussed in our press release yesterday after market closed and in documents we have filed with or furnished to the SEC. I would now like to turn the call back to our Chairman and CEO, Paul Pittman. Paul?

Thank you, Luca. So, just a few introductory comments and then I am going to turn to the specific slides that we have prepared. We once again have had frankly a good strong quarter although not – it does not exactly show up in the reported financial results at the profitability level that revenues, of course, are still quite strong. We will talk about the reasons why in a moment, but largely it’s due to the messy nature of closing an approximately $250 million merger during the quarter. We have – by closing that merger we have achieved the scale and diversity that we would like to see in our portfolio and continued the strong growth of the company. With the termination of the Prudential agreement that occurred at the end of the quarter, we have fully integrated the AFCO acquisition into the total Farmland Partners Company and we have been able to do that frankly, about 1 year to 1.5 years in advance of what we had modeled and expected. That should yield substantial positive results for us going forward. In terms of the sort of big trends that drive our business, demand for food stuffs on a worldwide basis, land values, so on and so forth, we are frankly quite comfortable that the long-term trends are still intact in terms of the row crop region of the company. In the Midwest, we are certainly experiencing headwinds that you all read about in the newspaper. But this is today a very large and diverse company on a nationwide basis we have as many regions, frankly, performing well as we have regions that are struggling. To give you an example, all of the moisture that has hit the West Coast in United States is going to lead to relatively good production and yields for our – for the specialty crop portion of our portfolio, which balances out the challenges of low commodity price in the Midwest. Turning now to the supplemental slides that we have prepared and I will start on Page 3. We have started to prepare kind of a standard set of supplemental slides and we hope to continue doing this going forward to try to enlighten investors about what’s going on in the company that may not come through clearly on the reported GAAP financials. So what you see on this page is quarter-over-quarter’s comparison of key metrics and since you can read them, I won’t go through them all, but I want to point just a couple of things out. So on a GAAP basis, revenues went from just under $5 million to approximately $7.2 million. That’s something we are quite happy with on its space and I will turn to some adjustments to that revenue number in a moment. But we are very comfortable with the continuing top line growth of the company. We think it represents our continued effort to drive towards scale and the adding of specialty crops through the AFCO acquisition. We also started to report net operating income and I think this is the first quarter we have actually put this number out. The reason we have decided to do this as we know that many of you, who track and follow other REITs, use this statistic and spend quite a bit of time focusing on it. So we have decided to start calculating it and reporting it every quarter. What net operating income means basically is it is just our revenues with the property operating expenses subtracted from them and those property operating expenses are largely property taxes and direct repairs and maintenance to those properties. There are few other small items in there, but it’s a pretty clean number that directly represents cash flow after property taxes and direct repairs and maintenance coming from individual properties. Moving to Page 4, which is the first – this is taking these 1Q 2017 revenues and adjusting for the timing of transaction closings and lease renewals as well as adjusting for the major lease terminations, which we were paid for in the fourth quarter. How I think about this page is for, in particular, the equity analysts who are running models, which may – which are very hard to predict the exact timing of leases and property closings. What we are trying to do here is to help you understand on a stabilized rental income basis for the purposes of how you model the company, what would have happened if you take the timing factors out of the situation. So to put this all in context, in the first quarter, we have collected $17.1 million of rental income. That’s the actual cash collected. A lot of that flows through our P&L through straight lining of revenues through the rest of the year. And I think it’s important to have that number in your mind to give you context about what we are going through on this page. So if you look at the first sort of green bar on the page, you see that the GAAP revenue of $7.15 million. Because we closed the AFCO transaction on February 2, there is a $510,000 amount of revenue that is frankly permanently trapped in the stub year AFCO financials. We collected that cash at the closing, we got that money, but it will never show up in our revenues. So that’s the first adjustment, $0.15 million, the effect of the AFCO acquisition having been closed mid-quarter. The next two adjustments, I will speak about at the same time because they are very, very similar. The first one is the affect of acquisitions we closed mid-quarter and again, the affect of straight lining, which is the GAAP requirement on the reported revenue numbers. So to use an example, if we closed an acquisition on March 1, we will still collect the rent for the entire calendar year in that acquisition. So – and this is very customary in agriculture that you get paid for a season, not for a month or a series of months, but for an entire season, but because of straight lining, what will happen is, we will not be able to report in the first quarter the first two months where the revenue on that farm and so we will be only reporting a third of the actual cash we received approximately in rents for that quarter through the GAAP financials. So that’s again, an adjustment of approximately $0.67 million. The next adjustment of $0.63 million is relay very, very similar adjustment. And an example of that, to give you one, is if we have a lease expire and many of our leases expire roughly December 1, that’s when the harvests have been completed in many of our crops and farms that we own. And if we do not put a new tenant on that property until, for sake of example, February 1, we will lose in reported GAAP financials, two months worth of revenue. In terms of the actual cash flow, we didn’t lose anything. That’s again, quite customary in the industry. Use Northern Illinois as an example. You get paid the entire rent even if you re-lease the property on February 1, because the farmer doesn’t actually care about leasing that property when there is snow sitting on the ground. And so, this is quite customary, again. We are frankly trying to clean that up in our leasing process, so our GAAP financials will be tighter with the actual cash results. But the reality is that we lost about – because of timing differences of re-signing leases, we lost about $0.63 million of actual reported GAAP revenue even though we collected the cash. Then the final adjustment – the final adjustment is, as you all know or many of you at least know, in the last quarter of last year, so at the very end of ‘16, we collected approximately $6.5 million termination payment for terminating a series of leases and then re-leasing those farms. When we re-leased those farms, the reason we collected the termination payment as we frankly, re-leased those farms at lower rates than we have been leased at. But if you had continued with the prior leases, which of course, we got paid for, you would had an additional $620,000 of revenue in the quarter. So when you add this all up, on a stabilized rental basis, we had about $9.6 million of stabilized rental income in the first quarter, that’s the absolute sort of cash results that if you take all this noise out that we would have had. And that obviously would have affected AFFO and AFFO per share and all the other statistics further down the P&L. Now one note of caution for everyone, please do not take this number and just multiply it by 4 and assume that, that’s exactly where we are going to be going forward. This – obviously, every quarter is different, every quarter has some changes, but we thought this was to give you an example of how to think about modeling and forecasting the business. Internally, the way we kind of think about our business is at least try to lessen the noise and manage better. As we look at farms we have owned for a year or more and we think about them really differently and the costs we associate with those farms in managing those farms, then the farms that we only owned for a few months. Once we own a property for 1 year or more, we generally start to wash all the GAAP noise out of the financial – out of the reported numbers under GAAP and the cash flow numbers we actually received start to line up frankly better. So we hope this is sort of helpful and informative during the Q&A, feel free to obviously ask any questions about it. With that, I am going to turn it over to Luca to handle Page 5.

Thank you, Paul. I am now on Page 5 and I also won’t go through every single number on the page, but I will just highlight a few kind of key figures and facts. First of all, in terms of our common equity capitalization as of the end of the quarter, common shares were about 32.4 million, common OP units were about 6.7 million. Given the interchangeability between OP units and common shares effectively, due to the umbrella partnership and REIT structure of our company, when we think about the float of the company, we are really thinking, think of either including both common shares and common OP units, so with a total of 39.2 million shares on a fully diluted basis. So thinking about the equity capitalization of the company based on yesterday’s closing price of $10.80, the equity would be $422.8 million. Once you add the preferred OP units that we have outstanding for about $180 million and net debt of about $430 million, the enterprise value of the company based on the public stock price, again as of the close of market yesterday is about $971 million. In terms of Q1 financial highlights, revenues were $7.15 million. Net income was a negative $2 million. On an earnings per share basis we had negative $0.10 based on basic weighted average common shares outstanding of 26.7 million shares. And then Paul already discussed the NOI of $5.3 million and I will in later slide also address some kind of one-time elements that affected NOI for this quarter. And then jumping down, AFFO per share was $0.01 based on about 33.2 million shares on an weighted average basis, which includes also the units. Dividends declared for the quarter were $0.1275 per share with the record date of June 30, 2017 and a payment date of July 14, 2017. I will now turn to the following page, Page 6, to specifically discuss debt outstanding. During the first quarter, we added about $55.5 million in term loans with MetLife. And also as a result of the AFCO acquisition, we acquired some debt with acquisition for a total of $90 million. At the closing of that acquisition, we also added a new line of credit with the AFCO’s existing lender, Rutledge for a total of $30 million, of which $2.4 million were actually drawn during the first quarter. So we currently now had $27.6 million, I should say as of the end of the quarter, we had $27.6 million in un-drawn availability under that line. During the quarter, we also converted from LIBOR based floating to 3-year fixed rates, about $106 million of facilities with MetLife. Our weighted average interest rate is 2.92%. The weighted average maturity, meaning our refinancing kind of term is 5.8 years, but our average interest rate exposure is about 1.9 years. Our loan to value kind of overall as a net debt over total assets is 44.3%. And after the conversion from float to fixed, we are about 78% of our debt is on fixed rates, ranging from 3 years to 10 years. Switching now to Page 7, the top of the page is really a breakdown of total GAAP expenses. I will call – I will draw your attention to a couple of elements. One, first depreciation, depletion of about $1.5 million as compared to $317,000 in the same quarter of 2016. The jump – the significant jump is due to the fact that not only we have grown the company and we have also done some improvements, which are largely depreciable offsets to some of existing farms. And more importantly, with the addition of AFCO acquisition and the addition of permanent crops, the depreciation and depletion in our balance sheet significantly increases. On the property operating expense side, $1.8 million this quarter as compared to $440,000 the same quarter last year. One big element of that $1.8 million is a one-time non-recurring expense of about $700,000 and it is related to the Prudential management fees as well as simply the fact that we had a much larger portfolio. The vast majority of our productivity expenses are really property taxes. And therefore, we have no control and that component. Going to the bottom side of the page. This is a kind of – we look at the reported GAAP and expenses and there are couple of, as I said, nonrecurring items that I wanted to draw your attention too. One is the approximately $700,000 of Prudential management fees. As you probably know, that contract has been completely discontinued. So there is going to be no prudential management fees from Q2 going forward. And also, we had about $628,000 in other acquisitions and divisions costs. Vast majority of that $515,000 where show up in our P&L as acquisition divisions cost, the balance about $115,000 are in legal and accounting bucket. Specifically, once you look back at the net operating income for the quarter, and since we defined it as total reported revenue minus property operating expenses, you really have to think about the fact that there is $700,000 in those property operating expenses that are nonrecurring items. And with that, I will turn the presentation back to Paul.

Thank you, Luca. So turning on to Page 8 and this is just a quick overview of our total portfolio. What this really represents is that we have achieved, as I said earlier, the diversification and scale that is really important to connecting an investor to that global food demand story in the pace of land scarcity. So when you look at the portfolio today, what’s important to note is, we began our life as a REIT and largely at Midwest Corn Belt portfolio. We have very successfully branched out from that. But still, most of the investment we have in the central part of the country is connected to the primary commodity crops, corns, soybeans, wheat, Rice, etcetera. But the crops that we own on our land, on both the West Coast and in Florida, largely and unrelated to that – to those primary crops, and include on the next page, and we will talk about what those crops are, but generally, our crops that do not trade in walk step with the commodities, this has provided a substantial amount of diversification in terms of rental revenue and where that rental revenue comes from, fundamentally and also whether the tenants on those farms are under any sort of pressure due to commodity prices. And essentially, the farmers on the West Coast are completely out of that general up-and-down cycle. Turning to the next page, we have on Page 9, is that the portfolio today is around 24% permanent and specialty crops, meaning the tree nuts, the citrus, the vegetables, etcetera, and about 76% raw crops. That’s on an asset dollar – value of the assets basis. If you look at kind of aggregate U.S. crop value according to the USDA, you would see about 22% is permanent. Specialty crops in a row crops is about 78%. That’s really the portfolio construction that we want. You may see us gradually add a bit more specialty as a percentage of our portfolio. Our prospective on that is as long as we can add specialty crops and increased total cap rate in the portfolio, but not add overall portfolio volatility. We will try to do that, and it’s really sort of discovering that efficient Frontier, if you will, or you can continue to add somewhat higher risk assets to the portfolio, but get overall portfolio volatility frankly, down. So you may see some modest increases, but we are still largely committed to running a portfolio that is – that is balanced appropriately between primary row crop and specialty crop. The right side of the page, it does amplify the number of – frankly, the incredible number of different crops grown on our land. On the specialty side, not only are those crops non-correlated with primary row crops, they are frankly not correlated in terms of price with each other. That gives us an immense about of diversity and stability in the cash flows of our rental stream. We have about 110 separate tenants across the 154 acres, which is gone a long, long way to less than any significant impact and concentration of any given tenant. With that, I think, I will turn it back over to the operator, Chris, and we will open it up for questions. Thank you.

Thank you very much. [Operator Instructions] Our first question is from Dave Rodgers of Baird. Please go ahead.

Yes, good morning, Paul and Luca. Thanks for all the additional information and the presentation and supplement. I wanted to kind of maybe ask a couple of questions about revenues and the directionality. You recorded about $7 million in the quarter on a GAAP basis, but you said you collected about $17 million. Can you talk about kind of the remaining cash rents that you will receive as the year progresses, assuming no additional acquisitions? And maybe guide us to where Q2 GAAP revenues going to come out as the year progresses as well?

Yes. As you know, we don’t actually issue guidance on a quarter-by-quarter basis by any means – and although we have actually guidance below the revenue line at all. What – I would actually, Dave, like you to do that calculation yourself, but what we tried to you is the building blocks to think about that in that one page where I build the revenue from the GAAP number of $7.15 million up to $9.6 million. So when you think about what GAAP revenue would be into – in the second quarter, you obviously do not add those lease termination payments. I mean those, we did already collected that money, it’s not going to flow-through the GAAP revenue. We put it out there as a factual example of what’s going on, but you certainly shouldn’t include that. Most of the rest of those numbers though, you will actually start to see come through in our GAAP revenues as you move forward. Obviously, we continue to make acquisitions. And obviously, any acquisition that we made post quarter end will also have a little bit to the revenue. And that ultimately, in the fourth quarter of the year, we collect quite a bit crop share revenue for the portion of our portfolio where we have some kind of participation, either as a bonus or as a direct crop share. On that point, and added note is that the Specialty crops tend to have crop share coming in all through the year. It’s not all in the first quarter because the harvest cycles are different and spread out through the year. So I think, we have given you kind of enough information. You can kind of build up to a revenue number that’s hopefully somewhat accurate. I don’t think I want to go really any farther than that at this point.

Is the GAAP revenue you reported reflect your estimates of what you anticipate receiving from a crop share perspective throughout the remainder of the year?

Yes. So what – so yes and no. So let me explain how we do that. So – and here is a lot of detail in the queue on this if you want to go look at it and then if you need to, feel free to call the company and will help you understand it. What we do is we take the crop insurance minimums that are available to our farmers and we will straight-line that crop insurance minimum revenue through the year. The – that is usually, in the neighborhood of 70-ish percent or 75% maybe of expected total revenue under reasonable assumptions of price and yield volume. But that’s what we include in the sort of ongoing straight-line financials during the first 3 quarters of the year. We do not – we don’t – anything above the crop insurance minimum, we wait until we actually received the cash, which is why you see that fourth quarter bump of some amount every year.

And that the last comment you made is specifically related to crop share revenue?

Yes, specifically, related to crop share revenue, we – yes, if we collected the cash first – we collect $100 for a given acre, $100, we would take $25 a quarter through the P&L on a straight line basis. If we – if it is a crop share lease, okay, then we will take the crop insurance minimum, which is really kind of the floor amount that we will collect. When I say the crop insurance minimum, it will be our percentage of that crop insurance minimum that we will get even if a farmer has a bad crop year. But we don’t take any more than that because we certainly don’t want to over report revenue through the quarter – through each quarter during the year.

Alright. Thanks for indulging that Paul. And maybe moving on, can you talk about what your acquisition pipeline is looking like today, you closed almost $100 million of additional acquisitions in the quarter, how healthy is that backlog and what types of changes have you seen in pricing?

Yes. The backlog is incredibly healthy. We have a really strong pipeline. Our challenge frankly is that we are close to fully invested in terms of the cash we have on the balance sheet. We at this point are working hard to do deals on an OP unit basis. We are likely to grow somewhat less this year than we frankly, would have hoped, because – we frankly, expected substantial stock price appreciation based on the AFCO acquisition and the termination of Prudential and all of that and frankly, none of which we got. And so we are pretty frankly, pretty disciplined in terms of trying to grow creatively without causing unnecessary dilution to the company. So we have got plenty of pipeline. We are frankly capital constrained is really the issue. In terms of what we are seeing in pricing, we are getting a modest decrease in valuation on some of the properties, obviously that’s happening a little bit in the Corn Belt, we are having opportunities to buy assets, less expensively than we would have been able to buy them a year or 2 years ago, but it’s not very significant. I mean there is – there is in a substantial amount of cash still in the farmers hands, in particular, who are the primary buyers of land and those guys still compete aggressively for farmland and occasionally, still see new records being set in the Midwest for land values and given new county records or new state-wide records of farmland values. Those are anecdotal one-offs. Our general sense as I have expressed in the past is that you are saying modest decline in Midwest Farmland asset values, but it’s frankly very modest measured in a couple of percent – percentage points, maybe 3 at the most. So that’s kind of a state of affairs out there. On the rental side obviously, you are seeing rents come down temporarily, to some degree, we are getting slightly better cap rates on new acquisitions than we had been given historically, but the absolute dollar amounts of those rents are coming down a little bit. So that’s the kind of balance of what we are seeing, which we had more capital to invest we think again, given the long-term trends, we think there are incredible opportunity out there. And the prices of asset values, rents and the demand or we will continue to be strong and the long-term story, as I said earlier is completely intact, but we are public company, we got to manage our capital allocation and our stock price to some degree.

Alright, that’s good to hear. Thanks Paul.

Thank you very much. The next question is from Rob Stevenson of – my apologies, from Jessica Levi-Ribner of FBR. Please go ahead.

Hi. Thanks so much for taking my question. Just looking back at the non-recurring expenses, when you mentioned the depreciation and depletion of roughly $1.5 million, is that a good run rate for us to use on a go forward?

Luca, do you want to address that question, please?

Yes, absolutely. Well, to think that being the large chunk of that depreciation and depletion increased coming from AFCO and we only owned AFCO for part of the quarter, with that one caveat, I would say yes, this is a good run rate.

Okay. So maybe it will be just a little bit higher?

Correct.

The other question I have is, so again on the property operating expenses, last $700,000 of Prudential management fees, we can think about that as maybe $1.1 million, again grossing it up a little bit for the AFCO for two months of lost AFCO kind of expenses?

Correct, yes.

Okay. And then just in terms of your outlook for crop prices going forward, commodity prices obviously there have been some significant headwinds, how do you think about that may be even in the next year or so and obviously, your long-term thesis with global food demand and supply, but just maybe how we can think about the next year?

Well, so predicting commodity prices for the next year is incredibly difficult. So that’s a hard thing to do. I think – but so let me – because it’s driven by some relatively – fundamentally, it’s driven by the weather. And so that’s good luck with that. But let me give you a way to at least think about it. And I think every investor needs to think about it. Now our perspective is to understand how I run the company. We run the company under the following assumptions. It will hit long-term historical trends, increasing demand for most foodstuffs and certainly increasing demand for a diverse pool of foodstuffs like we produce on our land. That is almost unchangeable. That is at this point a multi-decades trend. No reason to think that there is anything out there that changes those fundamental long-term demand characteristics. Population growth, GDP per capita, you name it, they are all still pushing in the same direction. If you pull stats on soybean demand, on corn demand, on a worldwide basis, these numbers are incredibly positive and incredibly strong long-term growth trajectories. People get all worried about what the U.S. market share might be. That’s a – it’s just kind of a non-issue. The U.S. is still a top two or three producer of all primary commodities, frankly. It doesn’t matter if it the total size of the pie is growing, our slice of that pie is growing. And it’s kind of horse race statistics that don’t make much difference, whether Brazil is number or we are number one in total volume, what’s important is that the total volumes for both Brazil and United States continue to climb up based on the incredible demand. Land scarcity is set in stone, I mean there is – I recently gave a speak in New York where we talked about in the last 50 years, U.S. farmland in production is down 19%. If you look forward, in the next 20 years to 30 years worldwide farmland production, land and production is often in the neighborhood of 2% or 3%. You just have reached a point that we need to feed the world with ever increasing productivity on the land we have. That’s going to drive long-term values. Now, going back to your – and that’s how we invest. I mean I am not – I can’t guess, I mean I trade commodities [indiscernible] farmlands we are living if I could guess what prices were next week or next year on commodities. But here’s what it will take to bring commodity – what we are experiencing is a temporary decline in commodity price due to substantial volume of production a couple of years in a row due to frankly, very good weather. What will change that is weather – a negative weather issue in some important production region in the world, whether that’s the U.S., the Ukraine/Eastern Europe, former Soviet Union Region or South America, Brazil and Argentina, in particular. I mean those are the three big bread baskets, if you will, of the world. If we have a negative weather event or really negative political event frankly, in any of those countries, that will decrease this production. You will see price of the primary commodities jump dramatically. A few days ago or after the was a big blizzard across the Midwest and the planes, you, so real jump in commodity prices that, of course, backed off, but what that indicates to you is careful observer, what it indicates is how close to the edge on the worldwide supply-demand statistics we are. On the main crops, corn, in particular, we have a very large carry out and you can see this in the U.S. via statistics. It will take a – it will take one troublesome production year frankly, though to burn through that carry out and put us back in a substantially higher price position. But again, I have said this in many calls in the past, the price of the crops, within reason is just – it’s a one factor, but not by any means, the only factor. For most farmers, you have seen productivity increases continue to move up, meaning they are producing more crop – higher yields on their land, they are producing it with the last total investment at input. One things on, for example, out of the field is the use of high-speed planters, which increases the number of acres that a given human being can plant in a day. So you have seen all this kind of productivity increases occur that increase profitability for the farmers. You have seen input costs for many of the inputs come down, whether it’s the key fertilizers or equipment or seed. And so your situation in farm country is – frankly, kind of stabilized in my view from where it was as long as we see commodity prices not go lower from here. I think that we are in a pretty good position. And we will see – at some point, there will be a negative weather event, which is going to take these carry outs away.

And actually, to build on that point, you have to think of the weather patent that we had over the 2 or 3 years of kind of nearly perfect weather pretty much everywhere in the world is the statistical outlier. Typical growing year, growing season always had some sort of – inverse at weather somewhere.

Okay, thanks so much for that.

Great.

Thank you. [Operator Instructions] Our next question is from Rob Stevenson of Janney. Please go ahead.

Hi good morning guys. Paul, what was the cap rate on those $100 million of acquisition you guys did in the first quarter? And then, what is it looking like stuff that’s you currently have in the contract?

Yes so, I mean, cap rate, we don’t release exact cap rates on individual transactions, but I will give you context. Our specialty crop, cap rates are generally running in the 6% to 8% bracket, meaning tree nuts, fruits, vegetables. There is some variation around that, but that would capture the overwhelming bulk of them. If you looked at – if you look at our row crop area, you are looking at 3.5 to 4.5 cap rates in those markets. And obviously, the 3.5s are the core of the Midwest and the 4.5s will be in the delta and the Southeast. In the Southeast, you occasionally see even into the low 5s on cap rates. And of course, as I always emphasize, think of our business from an economic cap rate, not a nominal cap rate basis because we are not really experiencing certainly, on the row crop farms any meaningful level of depreciation or depletion. So these cap rates are, while on the headline look below, on a true economic sense, actually given the risk of our portfolio, which is quite low compared pretty well. I hope that helps you out, Rob.

Okay. I mean, on the $100 million, $98.5 million, what’s the sort of – how should we think about the mix there between Specialty and raw?

I think – Luca, help me out here. I think that pool of acquisitions was probably 75% or a little more low crop acquisitions, and the rest of it was Specialty or something in that bracket.

Okay, perfect. And then on that Page 4, on the new release, very helpful, thank you. One question on that is – when you take a look at that, how should we be thinking about the contribution in the first quarter from the percentage participating revenues on the crop share stuff? How much of that is – in that number in the first quarter actually thinking about that going forward?

Yes, Luca, you may have some more precise numbers that we have in the public domain, but I don’t know precise numbers, but I will give you context. You will have in the first quarter of any given year in our business, some participating revenue amounts, and here is where they come from. So the big quarter for participating rents, if you will, is the fourth quarter and it will probably always be so. But you will have a certain – we have not marketed a crop, and we don’t marketed the farmer has not only marketed and disposed the crop, when we get to December 31, and that’s always occurs to some degree, you will actually see those revenues in the first quarter of next year not in the fourth quarter of prior year because unless we have uncertainty, we don’t book – we don’t – they are under contract, but still, we will show the revenue, but if they are not under contract, we really don’t show revenue. We always have a bit of a tail. And this shows up more likely in things like cotton and rice than in corn and soybeans and it has to do with the harvest times and how close to the end of the year and what the marketing cycle is for those commodities. You will also see some of the specialty crops because they are harvested at very different times through the year. You will see some specialty crops revenues that is crop share or participated in nature show up in the first quarter. I don’t know exact numbers that’s in there, Luca, if you have in the public demand will free to share it, but they will be some of that in that – in there.

No, we don’t have any.

Okay. But it’s certainly like when you are talking about insurance stuff, the way to think about this is, roughly, if you are straight lining basically 70% to 75% of the revenues that you expect to get over the year, that it looks like 18% or so of the crop share hits in each of the first 3 quarters, and then 46% or rough numbers there about hits in the fourth quarter. And just try to figure out: you know, if that’s the right map, or thereabouts? And then, b, what’s sort of – in that sort of run rate from a straight lining perspective?

Yes, I am trying to think about your math for a second, Rob, and on that particular question, call the company after the call, we will try to help to think about. I am not sure that’s the right – you said 18% each of the first 3 and then 46%, explain that again, if you don’t mind?

So if you take 70%, roughly, 70% to 75% is roughly, 18 – if you divide that by.

No, I understand. I think that is a pretty good way to think about it. But let me give you a couple of caveats, and I apologize for the complexity, but it is the reality of our business. And unfortunately, GAAP treats us like we are in an apartment and we rent everything by a month, and it just doesn’t wind up very well with our business. But here is the – here is the kind of things the other thing about. So we have got straight cash rents, those are easy, they are just straight line through the year. Then we have participating rents that have a major minimum amount of cash collected and we have quite a few rents that way. If the minimum cash collected is higher than that approximate 70% of crop insurance proceeds, potential, we actually a straight lining the minimum cash. Now if the crop insurance is higher than the minimum cash we straight line the crop insurance. But you have got that, and that you got that through crop share where we are mostly if not entirely, based on actual revenue production in a farm, and that’s where we are taking the 70% through. I think the best I can – I know what you are trying to accomplish and we appreciate it. It’s just a challenge for us in the nature of how GAAP treats us, that’s why you are seeing us with the supplementals start to kind of hopefully build your road map based on several quarters that you can use to create some metrics that you can – you can project forward more accurately. But I think, you are roughly thinking about it correctly, but remember, it’s not just cash or crop share, there’s that group in the middle where we have a minimum cash collection, which we tend to like, by the way, if we are going to do crop share, I would rather do with some minimum cash collection when we can – because it just lessens our risk.

Okay. And then the acquisition costs for one-off acquisitions are being capitalized at this point, is that true?

Luca, I will turn that over to you.

Yes. Especially with the change in the way to treat acquisitions, we are going forward, you are going to have all asset acquisitions and that will allow us to capitalize costs, yes.

Okay. So the only thing that should be running through the acquisition cost line item on the income statement would wind up being abundant pursue cost or some corporate level transactions like AFCO, again?

Correct. Because – well, even AFCO, probably would have – actually would have been treated as an asset acquisition most likely under new standard. We just – just the timing didn’t work out of adoption of the standard.

Okay. Thanks guys. I appreciate it.

Yes. Thank you.

Thank you. Next question is from Mitch Fitter of Aegis Capital. Please go ahead.

Hey guys, real quickly, on prior calls, you talked about book value, would you like to comment on the book value of the company?

I don’t know if we talked about it much in the prior calls, but – Luca, you want to address it, it’s on your slide, the asset value…?

Yes. Fundamentally, the way we think about the asset values of the company would – as far as book values are concerned, the only major divergence between book value and anywhere close to a real value is the legacy assets that we had at the time of the IPO 3 years ago, which for accounting reasons, we couldn’t mark to market. And the gap between book value and anywhere close to real market values at that time was about $53 million.

Okay. So in other words, if you looked at our balance sheet and you see as of March 31, approximately $971 million total assets. You basically add 30-ish to that and you will get a rough sense of the value of the total assets. We haven’t own most of our farms. We will see slight variations in – up and down over the last couple of years, but still many of the farms that we have acquired have been acquired in the last 12 months to 24 months. Frankly, awfully close in value one way or the other than what we paid for. I think it’s – farmland does not go up or down incredibly rapidly either direction. So we are going to be pretty close to what we actually paid for these properties with the adjustments that Luca just mentioned.

Okay. Thank you.

Thank you. Next question is from Randy Swenson of GVC Capital. Please go ahead.

Hi, Paul, Luca greetings, how are you guys?

Pretty good.

I have a question, I will try to put some perspective around your Slide 4 and understand the accounting a little bit, are all of these adjustments zero sum gains and what I mean by that is when I look at effective Q1 leases, I mean for the quarter and you got $63 million of additional revenue in this quarter, are there – because of the way the GAAP is straight lining, is there a compensatory reduction in future – in next year, in 2018, that you are not collecting the cash in the first quarter of next year and therefore there should be a compensatory reduction in this amount and similarly…?

Yes, not really. Let me describe – let me describe what happens and you can…

So cash really goes away—cash really goes away…?

Yes. Let me draw the conclusions – let me tell – [indiscernible] own conclusions. I will tell you what’s happening though. So looking at Page 4, couple of different things moving around, okay. So and let’s be kind of crystal clear about it. So on the lease termination group, that’s the item to the far right, 620. That cash, we already collected. That got – that’s big slug of cash we got of about $6.5 million in termination fees in the fourth quarter. So that’s not going to keep starting coming through in the future. That in fact, we already collected. I put it in here because we have got equity analysts and some of you in your loan funds run in models, I am trying to help you think about do you have your modeling wrong or did you just miss on kind of how timing worked, that’s what we do. So that’s one thing. Then go to the other end, the $510,000, which is effective AFCO acquisition closing, an unusual sort of impact of how GAAP works. That revenue is kind of “trapped” from a GAAP perspective inside AFCO’s stub year books for one month of 2017 that we didn’t own it. That cash, while we actually got the cash at the closing is never going to show up in any revenue anywhere. So I am just – so look at that, now the two groups in the middle. When we acquire a farm, if we acquire a farm on – you just pick a date, on March 1 and we acquire – let me actually make it even more extreme for you. We acquire a farm on March 25 and this actually happened this quarter. You close it on March 25. You have agreed that the rent for the 2017 crop season is $100,000. We only get to take in this quarter five days worth of that $100,000 under GAAP.

Yes.

The straight-line the entire, so let’s say it was a 3 year lease, $100,000 a year, GAAP requires us to straight-line the entire $300,000 through the full term of the lease, which is measured – clear till the end of 2019, for example. So what is happening is you are going to take less revenue in the ‘17 calendar year than you actually in a true cash sense in a business sense we are getting for that year. But you are taking slightly higher revenue in each of ‘18 and ‘19 than you really in true economic sense got for those years. You understand what the mathematical effect of that is. I don’t – I am not sure how to answer the question you actually asked but those are kind of facts of what’s happening. That same example also occurs if we have a lease expire on December 1 and don’t – on a row crops in the Midwest don’t actually re-lease it till January 30, that’s not by any means – I have been doing this for a long time, that’s got anything to do with we have having a hard time re-leasing it. It’s that in the real world, farmers and farm managers aren’t freaking out about “un-leased” farm when there is snow on the ground. They are just finding a new tenant and getting the lease put in place, but the way GAAP pretense [ph], we didn’t get paid for those two months. In fact, we did get paid for those two months. But that’s just what we are up against and obviously, we have to follow the GAAP rules.

Okay. Thanks Paul. So you answered the question. So in the case this was the leases, the lease timing issues, it is a zero-sum game in any – and there should be…?

Yes. I mean I think the way – I don’t know whether it’s I truly call zero-sum game. Here is how I always think about it. You really got to think about our – in an agricultural business, quarterly – the quarterly financials are a little bit challenging, because it’s the entire industry is an annual cycle industry. And when you – by the time you get to year, two things occur. As we get to the end of the year, a lot of the noise that I just described is washed out, although not entirely. But as the portion of our portfolio – and I alluded to this in my prepared comments, as the portion of our portfolio that we have owned for more than 1 year gets higher and higher and higher. The impact of these GAAP kind of imposed errors, if you will, go away or at least gets substantially lessened because there are small – most of these issues no longer exist once you have owned the property for more than 1 year, because you kind of clean – you have got the GAAP and actuals more or less on top of each other.

If you do 1-year leases have quarterly problems, if you do the leases, you said on the 31 March and you have the straight line revenue over the rest of the year, you basically take a whole year’s revenue of over nine months and you don’t get any credit in the fourth quarter…?

Yes. And that to be honest is frankly, misleading in the other direction because what you are doing is you are using up revenue in the three quarters.

Exactly.

That’s not fair either. What we are trying to get this is to get all of you folks on The Street, so to speak the best possible understanding of what’s really happening underlying. I apologize, but it’s messy, but like I said, we have to abide by GAAP, so we do.

Thank you, Paul.

Yes.

Thank you very much. Gentleman, we have no further questions in the queue at the moment, would you like to make closing comments?

Sure. Thank you all for joining the call today. We appreciate your interest in our company. We are of course, always honored that you continue to be shareholders and look forward to helping you I think through the performance of the company. If you have any follow-up questions, feel free to reach out to us at the company. Thank you very much.

Thank you very much. Ladies and gentlemen, this call is now concluded. And thank you for attending today’s presentation. You may now disconnect your lines.