Farmland Partners Inc. (FPI) Q4 2020 Earnings Report, Transcript and Summary

Good day and welcome to the Farmland Partners Inc. Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Paul Pittman, Chairman and CEO. Please go ahead.

Thank you. Good morning and welcome to Farmland Partners' fourth quarter and fiscal year 2020 earnings conference call and webcast. This is a very exciting time for our company production agriculture and farmland ownership in particular. After five or six years of difficult economics for farmers, in late 2020 and early 2021, we have seen increasing farm incomes and associated increasing land values. This improved outlook has led to substantial improvement in the stock price the key strength of farmland as an asset class with its ability to hold value in downturns accompanied by meaningful appreciation over multiyear holding periods. 2020 AFFO and revenue were disappointing partly due to asset sales and loan repayments, but also due to COVID and the lingering trade issues. The COVID demand drops over marketing delays were especially pronounced in the specialty crop sector. But most signs suggest demand will at least partially recover in 2021. Before turning the call over to Luca I wanted to welcome two new Board members. First, Mr. Tom Heneghan, who is the CEO of Equity International, he joined our Board last December. And Ms. Toby O'Rourke, who's the President and COA of Kampgrounds of America, she joined the Board several weeks ago. More about Tom and Toby's background can be read in the associated press releases we issued when they joined. With that, I'm going to turn it over to Luca for some introductory comments.

Thank you, Paul and thank you to all who are listening to this webcast live or recorded. The press release announcing our fourth quarter and full year earnings was distributed yesterday after market close. A replay of this call will be available shortly after the conclusion of the call through March 27 2021. 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, March 18, 2021 and have not been updated subsequent to this initial earnings call. In the Investor Relations section of our website, you can find a presentation with supplemental information that we will refer to during this conference call. During this call, we will make forward-looking statements including statements related to the future performance of our portfolio our identified and potential acquisitions and dispositions, impact of acquisitions, dispositions, and financing activities, business development opportunities, as well as comments on our outlook for our business, rents, and the broader agricultural markets. We will also discuss certain non-GAAP financial measures including net operating income FFO adjusted FFO EBITDAre and adjusted EBITDAre. Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the company's press release announcing fourth 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 March 17 2021. Listeners are cautioned that these statements are subject to certain risks and uncertainties many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the risk factors discussed in our press release yesterday after market close and in documents we have filed with or furnished to the SEC. I would now like to turn the call back to our Chairman and CEO, Paul Pittman. Paul?

Thank you very much. So, my prepared remarks this morning are divided into really three sections. First is about the farmland market and the farm economy generally, second is a little more detail about 2020, and third is our plans for 2021 and beyond. So, let me start with the first section of my remarks. The farmland market and the farm economy are in our opinion beginning a multiyear period of strong positive returns. In road crop regions, we're coming out of five or six years of difficult operator economics. But despite this sustained downturn asset values nationally for agriculture properties held up quite well. They increased about 4.3% from 2017 to 2020 according to the USDA land values report put out last August. We think that that appreciation trend will materially increase as we come into the summer of 2021. We have started to see that land value increases already in the Illinois market, in particular which is our largest group of land holdings by value. We are seeing $13,000 to $14,000 per acre sales, which are the highest numbers that we have seen since around 2013. And just as a cautionary note, not every property we own in Illinois would be valued that high, but our best properties probably are at that level. We think that price trend will continue. I'm going to refer to some of the slides now that Luca mentioned. If you can access them off of our investor website that would be great. Because I want to spend just a little time drilling down into why we see this appreciation now and why we believe it will continue. In the last several months, we have had very -- quite a few new investors in our company. So I'm going to start a little bit from the beginning of what really drives the asset class. This is on page 3, if you're trying to follow along. The fundamental thesis of our company is a gradually increasing food demand in the face of land scarcity is what drives farmland values and what will ultimately drive our stock price. What you see on this chart is worldwide population growth, and that accompanied with GDP per capita growth really drives increases in global food demand. What you see on the right side of that chart is a decline in tillable land per person in the world. And the declining availability of land per person is a huge driver of farmland value increases and it will continue to occur in our opinion. This is partly due to gradual urban development and other higher and better use of that farmland. But also significant amounts of farmland around the world are irrigated from non-permanent water sources. So, we anticipate a continuing decrease in the availability of farmland and certainly for the next several decades if not longer continuing worldwide food demand increases. If you're trying to follow along, I've moved on to page 4. And what this chart really shows is a 1970 to present long-term CAGR for Farmland value growth. This comes from USDA statistics. That long-term CAGR is 5.7%. We really think this long-term appreciation trend will continue. It may be slightly muted from that 5.7% due to the relatively low interest rate environment we face. But it will certainly continue to see Farmland appreciation in our opinion. This long-term appreciation is the most important driver of land value, and therefore, should probably be the most important driver of our stock price. AFFO and revenue are certainly important, but they are secondary. Traditional REIT investors, in our view, are overly focused on purely the revenue and AFFO growth. They need to take into account, both the current yield and the long-term appreciation yield of these assets. The reason that we believe that it is different for Farmland portfolio than other real estate asset classes, is we to a substantial extent do not have any real depreciation in our properties. We are a long-term land portfolio without the associated depreciation and repair expense that you would have if we had built real estate. Moving forward to slide 5. The drivers though of land value that do relate to operator economics meaning farmer economics, the key statistic is revenue per acre. And long-term revenue per acre growth is mostly driven by increasing yield of corn or soybeans or wheat or whatever crop you're growing, and secondarily driven by price change in the commodities markets. Farmland does not and should not trade based on near-term movements in commodities. It's trading on relatively long-term movements of the predicted revenue or profit per acre. What you do see here though is long-term growth, and I use corn and soybeans as an example, but long-term growth in yield per acre. Approximately 1.3% growth per annum doesn't seem like much. But what it really means is that from 1990 to present, you have probably seen something in the neighborhood of 200% to 250% -- $200 to $250 per acre increase in grain yield on the corn side and about $150 to $200 per acre of profitability increase due to bean yield. These factors get capitalized into land values and that's what's really driving the long-term appreciation chart that I showed a few minutes ago. Moving on to Page 6. What we're trying to demonstrate here is what we think will happen. As you have seen, grain price increase and yield increase but relatively stable farmland for the last five or so years, what do we think is going to happen in the next two to five years? So a couple of important observations on this chart. The blue bars indicate that farmland from approximately 2014 to 2020 was slightly increasing but fundamentally stable. That was a 4% or so appreciation I talked about 10 minutes ago. Where we are now is what are these blue bars going to look like? What is farmland value going to look like in 2021, 2022 and so on. Our view is that what you see happen is that you will see grain price increase. That increased grain price is multiplied against a elevated demand that has occurred during the grain price downturn. That elevated demand is incredibly inelastic, so it doesn't go away very quickly with price increases and that's of course because it is food. That ratchets up the long-term value of farmland. That takes a little while to show up in land values. It shows up most quickly in the Midwest and then shows up in the rest of the country more gradually. But we are – what we are seeing is commodity price increases, demand increases, production increases, driving increased revenue per acre and that that's going to show up strongly in land values. It has already shown up, as I indicated in late 2020 and 2021. On top of those factors related to increased productivity and price for the grains, we have a relatively low interest rate environment. There's substantial pent-up demand amongst farmers to expand because they haven't for quite some time. There's fear of inflation. The specialty crop demand will rebound as COVID moves into the rearview mirror. And the higher and better use demand for farmland for development – the real estate development, wind development or solar development is also very strong. So we think we're set up here for a relatively strong land price appreciation in the next two to maybe even as much as five years. Again, a little bit of caution, relatively strong in our asset class, means, 5%, maybe if you're lucky 7% appreciation, maybe only 3% or 4%. But a certainly stronger appreciation environment than we have seen in the past. Finally turning to Page 7. I want to just want to focus just a little bit on what's happened at grain prices in the last six months. And again this is corn and soybeans because those are the primary crops that are in our portfolio, certainly on the row crop side. This short-term run-up really bumps farmer profitability. Many of the good farmers that we have as tenants and farmers like them around the country will have had strong enough balance sheets to sit on a substantial amount of grain during the downturn; sometimes literally millions of bushels and for almost anybody hundreds of thousands of bushels. As they saw, the grain prices recover starting around mid-October that – they have started to ship that grain. This has led to incredibly strong cash availability for most farmers today. And you're seeing that cash availability show up, partly in land prices, certainly in demand for farm equipment and you will see that trend continue as they continue to liquidate the leftover volume that they did not sell in the downturn. So we think we're, as I've said, in a position that we're going to have very strong economics for farmers and certainly strong economics for land values. I'm going to return to the last slide in that section when I go through some comments about the outlook for 2021 and beyond. So now moving to the second part of our prepared comments. 2020 revenue and AFO suffered. I'm not going to sugarcoat it. It's disappointing to us. It was probably disappointing to you. The row crop regions from a productivity perspective were stable to good in 2020 for us. But you had low prices during a significant portion of the year. The high prices for the grains didn't show up until October or later really. I started to see it in the last bit of August, but nobody really believed it was permanent including me frankly until you got strongly into the fall. So therefore you haven't seen huge increases in rental rates, we think most of the rental rate increases will come in 2021 renegotiations because we had a lot of our rent rate renegotiations already done by the time we saw grain price recovery. You also had seen lagging demand on the grain sector particularly related to reduced ethanol production on the corn side. The USDA outlook now though is quite a bit stronger. It's driven by higher exports in the face of relatively low stocks for the primary feed grains. What's behind that is China. China demand for grains from everyone, but particularly from the US is surging. I pulled just a couple of statistics to share this morning. Corn imports into China are 404% above where they were last year. Bean imports are 42%. Let's focus just a minute on these corn imports. Something we've said for many years here at the company is that what drove the last surge in land values was really significant increased exports of soybeans from the United States to China. That occurred in the site -- that occurred really strongly in a cycle that went from about 2007 or '08 probably started a bit early and was really strong clear up to 2013 or '14. That massive increase in soybean demand pushed particularly Midwest land values quite a bit higher. We think that the Chinese economy is now going to do the same thing with corn. It's unclear whether this is just refilling the stocks that they might have burned through during the trade war. As you recall, there was the Asian swine flu that occurred. That reduced their need for feed grains for their hog inventory in particular. But today, we are seeing just I mean it's unbelievable when you look at the charts the commodities traders are looking at massive increases in corn demand coming out of China. Most of that demand will be satisfied by US corn. There are other corn producers in the world, but not nearly as many competitors to the US as there are in the soybean side. Our revenues as a company are about 60% from the grain -- from the row crop assets. So this is obviously a very positive factor for the company. When you look specifically at the operating results of 2020, it's a really tough year for specialty crops in general. We look at revenue, which -- and the revenue decline to be frank just fell straight to the AFFO decline. We had about $1 million reduction in revenue, actually a little more than $1 million. That is really just simply from the asset sales program we were engaged in and the repayments of the loan program that we had started. There's nothing you can do about that. It is what it is. We were on a strategy of selling assets at a premium and buying back stock. That strategy obviously worked. But that was about $1 million of revenue reduction. We also saw in the citrus side of our business particularly lemons we saw in the neighborhood of about a $700,000 reduction in our bonus rents related to the citrus farms. The reason I call lemons out in particular is that lemons as a demand is largely a bar and restaurant trade. And COVID in particular substantially reduced the demand for our citrus lemons in particular. We've also seen quite a bit slower marketing process of almonds and pistachios. We saw something in the neighborhood of $2 million to $2.5 million reduction in our bonus rents related to those crops. Part of that is a slower marketing process. Part of it is a little bit of how we restructured and changed a lease with a longer tail in the marketing cycle when we get paid. Some of that is Pistachio alternate bearing issues. I think many of you know that pistachios have a good year and a bad year in alternate. But some of that lost revenue will be recovered. I don't want to quantify specifically how much will be but some of it is more of a delay than a loss. Whereas the citrus example I gave you that's revenue we're not going to get back because those lemons to be frank got left on the ground instead of fully harvested. So looking at 2021, we think the key recovery for the operating statistics of the company not the land value, but the revenues of the company is really about seeing the specialty crop demand recover. We feel pretty good about that. It's uncertain. The citrus harvest is coming up soon. So I'm not sure you're going to have the restaurant and bar trade fully operational again, as you come into this lemon harvest cycle, but we are optimistic it will certainly be better than last year. Moving on to just a couple of other matters. Legal fees related to the Rota Fortunae litigation was about $0.08 a share. That's going to continue to be elevated for the 2021 year, but we know it will eventually come to an end. There is a trial date in the third quarter of 2021 in that case. And so, we do think the affirmative case, as we call it, the case against Rota Fortunae will at some point come to an end. We, obviously, are hoping for a financial and reputational win from that process. Turning to the class action lawsuit for a second, which, as I've said many times, is if anything more frustrating than the Rota Fortunae litigation, yet another plaintiff in that -- this is the second time this has happened, that the lead plaintiff has resigned from the case. What we believe happens is, they get into the diligence process and the discovery process, depositions and the like. They become convinced of what the truth really is, that the company didn't do anything wrong and they give up on the case. It happened about almost two years ago. The substitute plaintiff, The Turner Insurance Agency also dropped out now just about a month ago. I am guessing, in this lawyer-driven frivolous process, that we unfortunately, as the existing shareholders of the company, have to live through. They will find another person to serve as the lead plaintiff and we'll have to continue to fight that. But that's the status there. Turning to the net asset value. We believe that net asset value now is probably in the neighborhood of $14 a share. That's looking at land appreciation in the markets. We think it's appreciated strongly, looking at book value, looking at the various USDA data we track. We think the company is historically reasonably levered. We think that you were dropping substantial additional value to the equity holders' share price, through this land appreciation and the transactions we've done for stock buybacks. I think that that will show up in the data that the USDA puts out this summer. But there may be a bit of a lag in the way they collect their data, but we are seeing -- and if you just go look at land values on recent auctions in the Midwest, which are easy to find, you'll see what I'm talking about in substantial land value appreciation. So we're thinking $14 a share is the appropriate NAV level at this point in time. We think the other regions will appreciate, although, they will show a lag to the Midwest as I said before. It shows up a little slower. So now going to the third part of our presentation, about plans for 2021 and 2022. In the last few days, I've gotten a lot of e-mails about what's the company's status on asset sales going forward. We are likely to decrease the asset sales program going forward. We will still, of course, entertain on an opportunistic basis offers for our farms that we think are at prices that are very high, meaning we can replace that farm. As I said, farmers will be excited about acquiring assets. Again, we've got quite a few inbound inquiries. But unless they are substantial premiums to what we've invested in those farms, we'll end up declining most, if not, all of those offers. We are seeing the premiums being offered climb at this point. We will also, though, continue to do asset sales when we can mix together, sort of, our environmental or wildlife conservation principles with our desire to create value for the shareholders. And we've done that recently with the Ducks Unlimited transaction, which we're very happy with and we're likely to continue to do some of those things from time to time. If you want to -- if you can go back to slide eight in the PowerPoint that we put on the investor website for a second, I do want to go through a couple of things here and just summarize kind of the strategy we really operated with for the last couple of years and as we bring it a little bit to a close. So from 2018 to 2020, Farmland Partners sold about 13,400 acres of land for gross proceeds of about $88 million. That was a 16.8% gain over book value. We took that money and we paid off the associated debt with those farms and we largely invested the rest of the proceeds into repurchases of our common shares and our preferred shares. We frankly did that as a strategy that was playing the best hand we could, based on the cards we were dealt. We are now going to shift back to growth. But, when you look at what occurred on the 2018 to 2020, repurchases of our own securities, we think we made the shareholders that remain today, something in the neighborhood of about $50 million from those repurchases. That's in the neighborhood of $1.50 a share. Those repurchases were done, at prices that we thought were at about half of what we believe the NAV of the company was at the time. And so we feel, -- it's not what I wanted to do, but it's what we needed to do, as stewards of your capital and frankly, my own capital, as a large investor. And so, we are going to kind of close that chapter and move back to growth. But I wanted to just summarize, what we view as a very positive net effect from that program. The -- now looking forward, economies of scale will lead to large increases in the profitability of this company, as the revenue goes up faster, than the overhead. We're going to push growth of the company through off-balance sheet vehicles, which we believe will be accretive for AFFO growth, because of the fees we receive, with a relatively low amount of capital we need to invest, the opportunity zone fund which we announced in January. And did the first closing on of asset sales in March, is an example of that. We believe that opportunity zone fund will grow. We are an adviser to the fund, not the primary sponsor. But we do think that vehicle will grow, and increase assets under management and associated fee income for Farmland Partners. A second sort of off balance sheet initiative that, we are getting behind and pushing, we are going to restart the Farmland Partners loan program, we're going to call it the farmer bridge program. We frankly at this point believe that, all of the associated litigation noise and accusations that were falsely made against us have been debunked. There is a huge need in the marketplace for, asset-based lenders in the asset class. Historically, we received unlevered returns that were in the -- meaning yield on those loans in the neighborhood of 7% to 8%. We will seek a joint venture partner probably to pursue that program. We're in that process now. We think that deploying capital with the current yield that hopefully is in the low double-digits with appropriate use of leverage to our shareholders is a good strategy. We're going to hopefully enter that program during this year. We will also continue to focus on sustainable and organic conversions of Farmland. We've done a small amount of this. And we're likely to do more. We think that, row crop rents will gradually be pushed up. Again, I emphasize that we're gradual, but we think we'll start to see an opportunity to increase our rents in a meaningful way. Last few years have been slightly down, flat or slightly up. Sort of most of the leases were going up, but only a tiny amount. And the few down-strokes that we add in lease renewals, more or less wiped out the gains we had on most of the portfolio. That we think is a situation that's going to be changing in the 2021 year. We're going to gradually lower the overall leverage levels of the company. We -- many of you have criticized us, frankly, for being over-levered particularly in a combination of both, our preferreds and our debt. We have reduced some debt already with asset sales but we're going to continue on that path, and probably accelerate leverage reductions. This growth strategy will require some investment in the company. We're likely to see increased overheads modestly over the next couple of years. And those increases in overheads will be in advance of the increases in revenues. It's going to be a combination of investments in human capital, additional people, investments in technology to more efficiently manage a greater -- a growing pool of assets, and investments in JV-related structuring costs. We're going to do that. We're going to focus on the growth path here for the next couple of years. If it works, it will have substantial rewards for equity holders. If it doesn't, it's frankly a tiny portion of our overall asset base. And we will frankly return to the asset sales program, if we need to, to maximize shareholder value. We are quite willing, as the history's shown to arbitrage private land, values against the public market discounts when they exist. But we -- our intent is to grow our company and to continue growing it. I want to -- I'm going to turn it over to Luca, then to make a few comments specifically on the financial results, and then I'll take it back and do a little wrap-up.

Thank you Paul. As usual, kind of, walk you through some of the financial highlights for the 2020 year versus the prior year. In 2020, total revenues were about $50.7 million versus $53.6 million in 2019. Paul already highlighted some of the major drivers of this revenue difference. Certainly one of the major issues were -- major factors impacting them were the asset sales and the repayment of loans that we had made to certain farmers. The pandemic certainly had a meaningful impact on some -- specifically some specialty crops that are tied more significantly to the consumption of food away-from-home. As Paul mentioned lemons is an example of that. Also trade issues did impact some other specialty crops for example in -- for almonds. Although some of that is more of a delay in the pricing and the marketing of some of the crop. So a portion of those revenues -- the revenue decrease will be probably a shift really from 2020 to 2021. We also had a change in some lease structures in some large specialty crop leases that change from a base and bonus structure to a pure variable rent. In that -- in those cases the -- in 2019, we had been able to recognize some of the revenue, some of the base rent revenue in the year, while the variable component is all in the following year because of the -- of how the crop year works. And, therefore, in this case we have also a shift of revenue from 2020 to 2021. In terms of total operating income, 2020 was at $22.3 million versus $26.3 million in 2019. In 2020, the basic net loss to common stockholders was $0.18 a share versus a net income of $0.04 a share. One of the differences here was just in the timing and dynamic of gains related to asset sales. And finally AFFO per share in 2020 was $0.06 versus $0.13 in 2019. We internally estimate that were it not for the impact of the COVID-19 pandemic and of the litigation expenses related to the short and distort attack that we suffered about 2.5 years ago, we would have currently an approximately covered dividend, meaning the AFFO will be approximately $0.20 per share. Currently the fully diluted share count as of today is 32,207,458 shares. A quick note besides financial highlights is in relation to a new effort in the company focused around ESG, environment social and governance. We feel that Farmland as an asset class is and has always been intrinsically environmentally friendly. This is all about preserving and improving the land, minimizing chemical and nutrient leakage because they are costs for the operator, improving water use and improving land erosion. So this is all factors that are absolutely center in what -- in modern farming practices and we just want to continue encouraging them and monitoring them. And already now -- in underwriting our acquisitions we've always been focused also on climate resilience especially in areas more prone to extreme weather events or in coastal areas. Farm lenders and asset class is also intrinsically social factors friendly. Modern agriculture especially the way we do it here in the U.S. is really about making food affordable for all. And certainly very few social causes could be top of the list than fighting worldwide hunger. And finally as a public company, we are meeting the highest governance standards by overall business standards. So going forward on this ESG specific effort, we intend to really focus on measuring and benchmarking our ESG related performance and we will focus on how over time we can improve our disclosure of quantitative measures related to these topics. This concludes my remarks. Thank you for your time this morning and your interest in Farmland Partners. Operator, we would like to begin the question-and-answer session.

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

Paul, Luca, good morning and Paul, thanks for all the details this morning. I wanted to -- I guess, maybe talk about acquisitions and the ability to grow the balance sheet going forward is something that you detailed. And I understand Paul your comments around a --$14 NAV and that maybe cash flow isn't as important today versus the underlying land value. But, I guess, I'd love to get a sense what's trading in the market for acquisitions? And how aggressive do you think you can be? I think your stock is about 74 times cash flow. Your target you said is about 82 times cash flow. So it looks like you're pretty close to being able to go out and really, really get aggressive on the acquisition front. So is there enough trading for you to go do that?

Yes. There's -- you mean in terms of -- I assume the question about trading of land assets being traded?

Yes, yes exactly.

Yes. I mean this is a massive market. Probably $2.5 trillion of farmland assets out there in the US, Institutional ownership is 5% at most. We're one of the probably top five or six institutional owners of farmland in the country, but we're tiny as a percentage of the overall asset. Historically, $30 billion -- billion with a B trades each year. So there's a lot trading. The challenge we're going to -- and we are being more acquisitive. I didn't talk about it specifically because we don't go out and just talk about each individual transaction we do. But we've bought a few row crop farms. And we saw this -- we saw what we thought would be a surge in land values. Probably starting like I said around Thanksgiving it became more obvious to us. And then you still could find a farm that didn't sell at $13,000 or $14,000 an acre. And we bought a few good farms and we've added to the portfolio, but it's a few million dollars worth of purchases. We -- so we're out there in the market. We are looking for large assets we can acquire. But we are very focused on how do we increase shareholder value not purely grow the company. And today, we're sitting on more cash than we have set on in the past. Part of that is through the investment we got when Tom Heneghan joined our Board. But part of it is that we've made a few continued asset sales at good prices and we haven't bought back stock as we saw the stock recover strongly. So there's the preferred that we should be out probably paying down if we can. There's a few debt instruments that we have that are relatively higher interest rates. And so we're going to do things that hopefully -- it's not that we're insensitive to AFFO per share, but we just -- the way the true asset trades is appreciation first current year profitability second as you judge asset value and we think our stock price should over time reflect that. But I mean, I said revenue and AFFO, I didn't say it was the tenth issue. I said it was the second issue. We do need to focus on it. And so we're going to invest our dollars in the way that's most accretive to shareholders on a revenue and AFFO per share also keeping in mind that growing asset value is powerful. And with some level of leverage it really falls down to value creation for the common shareholder.

I guess, talk about how you're thinking about potentially the issuance of equity. It's been many years, but you talked about deploying money into the loan program. You talked about deleveraging. You talked about acquisitions and slowing asset sales. So I guess with the combination of all that and given where your leverage is how do you think about that today? Is that something that's off the table, or is that something that you're open to tackle some of these issues?

No. We would consider equity offerings, but it's not really our first choice to drive growth today. And the reason for that is our shareholders many of whom have been with us a long time they had faith in the management, faith in the company, faith in the Board and employees and they've stuck with us. And I don't want to -- finally having a sunny day again, I don't want to just do a big equity issuance and hurt them including myself again. So I think it's nuanced, right? If we see continued strong equity values, we might issue some equity in an ATM in other sorts of ways. We'll certainly observe what happens in the market and keep our options open. But what's more likely to be the case is we're going to go and grow the asset base that we have through joint ventures using a tiny amount of the capital we have on our balance sheet to see these things as we do in the opportunity zone situation. And we're going to grow AUM company scale efficiency without growing the share count very much. That would be our first goal. Now we turn around and we see a stock price that's approaching 20, I might change my mind. But I mean that's -- you got to balance shareholder value growth -- share price growth with total asset value growth. We think these off-balance sheet joint venture type structures is frankly a really good way to do that. You spread the overheads over increasing asset base. You probably are gathering up a pool of assets that the public REIT eventually owns. It might be five years or 10 years, but we're in this for the long haul.

Last question for me and I appreciate that added color. I guess, the last would be you had mentioned the redemption of the preferred B, it had been trading at a discount. But maybe from a bigger picture perspective instead of chipping away at it, can you remind us of the opportunities maybe to get back to that preferred B and even some of the A units out there with the above-average yield today. Is there a way to get to these that would again help the cash flow of the company and potentially deleverage it as well?

Yes. I think the first thing that I recognize regarding the preferreds, and just as a bit of background for everyone else listening. We have two preferreds in the company a Series A and a Series B. The Series A was privately issued to a Mr. Gerry Forsythe and his family when we acquired about $200 million of farmland in Illinois five years ago. That's $117 million face amount of preferred. We could redeem that today for cash if we chose to. We do not have to redeem it for another five years. And when we get to the point where we have to redeem it, we can actually use either cash or stock. That's an excellent security. It's 3% coupon with no new additional appreciation feature. But if I could redeem it in some way and move a 3% coupon preferred to a 1.3% or 1.5% dividend on common, you might think about it, but we've got a lot of time. There's no rush there. So that's Series A and that's kind of our -- we're thinking about all the things we can do to delever the company, increase the cash flow, and grow the asset base, but we want to do that in a way that maintains and enhances individual shareholder value. Turning to Series B, Series B is slightly more complicated, but also a huge opportunity. The first date we have the right to call that is in about October of this calendar year. And when we call it, we can convert it into common shares if we chose to. Again, we have a lot of time. We don't need to do anything for another 3.5 years from today, but we start to have the opportunity. The accretive value from an AFFO perspective of exchanging a 6% coupon preferred for 1.5-ish dividend yield common is immense. But again, you got to balance those things and figure out kind of what the right thing to do is. Again, I emphasize we don't intend to get ourselves trapped with a short fuse on either of those preferreds. And so we feel like we're in the driver seat to do something opportunistic when the timing is right.

All right. Thank you, Paul.

Thank you.

The next question comes from Rob Stevenson with Janney. Please go ahead.

Good morning. Paul, can you talk about how much NOI you're expecting from these off-balance sheet vehicles as well as the farmer loans on a run rate basis?

Yes. So, it's a little hard to quantify, but let me give you a couple of examples. So, starting with off-balance sheet asset management, and it depends on the features of the vehicle and how much work we do, and whether we're the primary capital raiser or just an adviser. But you're going to see something in the neighborhood of 75 basis points of assets under management fees up to 1% or 1.1%, so that kind of bracket on those sorts of vehicles. The reason there's a range is, if we were managing assets that are all specialty crops, it's a more -- much more intensive management process for our team. So you'd end up with a high-end of that range in fees. And if you're doing purely Midwest row crop, much more efficient from our side, so you'd see something at the low end of that range. So that's the bracket. As those assets under management grow, we don't carry the debt cost. We don't carry the equity value of the farm. Although, the opportunity is one situation we still own 10% of those assets approximately. But that's the kind of fee level that I think you should expect in any of those off-balance sheets. The loan program is a little different. We're hoping for a joint venture partner there where we share some asset management fees and then a percentage of the ups. If you put the appropriate structure in place, you should be in returns to the equity capital, the seed capital that's probably in the low to mid double digits on those assets. The face amount that the farmer sees who borrows the money is that 7% to 8% money. But if you do a sale-leaseback transaction, which is the way many of those will be done, you're going to get in effect the ability to put regular mortgage debt underneath, what we and our joint venture partner invest and that's going to give you a pretty substantially enhanced return to the equity invested in those loans. So that's a little harder to quantify, but probably a more profitable vehicle, which is why we tried to do it several years ago, and want to go back to it. We think it is a very – it's a really nice way to balance some higher current yield with what we love about Farmland generally being that long-term appreciation story. But Rob, you followed us, and I thank you for that for quite a few years that's the real challenge for us as a public company, and for the equity investor in us as a REIT. That I think everybody loves the assets and struggles with well how do you get the yield high enough to make the company look like – look mostly, like other REITs. And so that's one of a kind of a strong idea for growth for us, because we think it really helps by getting that higher current yield asset into our pool of ownership. And we believe, we're perfectly positioned to participate in that, because not only do we have capital and expertise. We will look at the repossession of a farm as a much less of a problem than almost any other investor in the space would, because we're happy to hold the asset. Hope that answers.

Okay. Yeah. And I guess like, how are you guys thinking about it? So you guys are doing sort of rough numbers about $50 million of revenues a year. I mean, is there a limitation of 5% or 10% or 15% of what you want coming out of essentially fee income, whether or not it be the management or the loans in terms of the overall mix of the company?

Yeah. It's – there's going to be sort of REIT rule questions we're going to have to consider, but I don't think we see some sort of artificial limit on how much of that we can do. But if we could – I don't think it becomes bigger than our rental income. But if it became 10%, 20%, of our total revenue, I'd be thrilled, because it's high current yield. And in our view with a gradually appreciating asset class, it's relatively low risk. So we're – if you make these loans sort of maximum of 75% to 80% loan-to-value in the market we're going to face in our opinion for the next few years, you're going to be increasing – you're increasing your cushion every year as a lender not decreasing it, and getting pretty good return it's a good place to be. And so I could see it become meaningful. It's not going to happen overnight though. These are loans that are largely going to be the amalgamation of a lot of the low end of a couple of million high-end of $10 million will be where the bulk of those loans get done. They're not going to be $50 million at a time.

Okay. Helpful. And then last one for me. You talked about $0.08 of legal costs from the Rota Fortunae stuff in 2020. And you said, you're going to have cost again in 2021. How much is that expected to be? Is that a similar amount that we should be thinking about? Is that more as you go to trial and have the additional trial cost? How are you guys thinking about that cost to the income statement in 2021?

I think on an annual basis, it's hopefully in the same neighborhood. I mean, it's an incredibly hard thing to quantify, Rob. I think it will be higher in – we're in trial in the third quarter, it's going to be an expensive quarter. But at some point, this comes to an end, and then all of a sudden, it's not an expense at all. So I think since we think this will come to an end that the – that $0.08 is as good an estimate as I can give you.

Okay. Thanks, guys. Appreciate it.

The next question comes from Dane Bowler with 2nd Market. Please go ahead.

Hi, good morning, Paul and Luca.

Hi, Dan. How are you doing?

Good. I just got a question on NAV and then a question on revenue. So on the NAV side the assets on the balance sheet are obviously quite a bit larger than the market cap of the company. So the NAV appreciation as a result of farmland depreciation is probably more – significantly more than one to one. Can you kind of quantify that amplification?

Absolutely. So when you think through the securities we have on our balance sheet round numbers we've got $1.1 billion not looking right at the balance sheet. Correct me, if I'm way off Luca, $1.1 billion, $1.2 billion or something in the neighborhood of assets – of farmland assets. You've got $500-ish million of regular debt. They don't share in any appreciation. You've got another $117 million of Pref A. That doesn't share in any appreciation. And then you've got about $145 million, $150 million of Pref B. Pref B shares in half of the annual appreciation that accretes to the face amount of that security. So when you bake all that, and you take it run it through the math, what you would see is a 5% increase in farmland and I'm not making that as my annual prediction. I'm using it as an example. That leads you to $55 million or so of appreciation value, 32 million shares outstanding. If you do that you put $1.50 of value in each share more or less. It's that kind of mathematics. Leverage is a very positive thing in the private ownership of farmland. As we have all talked about many times, public markets do not like our leverage level. We think that by gradually reducing leverage, we will see stock price appreciation. Otherwise, we wouldn't do it. But the silver lining of our leverage is this appreciation accompanied with the major buybacks we did at such substantial discounts to NAV is going to have a very positive appreciation factor for the current equity holder.

Right. Okay. And then on the revenue side, with soybean and corn prices going up so much, as well as other row crop commodities, how does that revenue delta to the farmers translate into rental rates? Is it going to be rental rates staying a similar proportion of the farmer revenues, or is -- how does that change?

Yes. So, Dane it's -- I always enjoy talking to you, because you -- maybe it's because you're Wisconsin-based, you've got a real fundamental grasp of how this all works. So you're exactly right. In each region of the country, we have a target of revenue per acre that we're trying to take as rent. In the very best growing regions of the nation like Illinois and Eastern Nebraska, you might see that target in the mid 30%. So, think 35% or even more or a little bit less. In your less productive regions of the country, where there are more operating expenses as a percentage of revenue, you'll see that number decline. The lowest places in the grain sector are about 25% of revenue and it falls out between that 35% and a bit higher or 25%, depending on the region of the country. So as -- so increased revenue per acre will lead to increased rent per acre, but there is a lag. And the reason there's a lag is, first the farmer really -- he's got all that grain inventory and he's as I talked about earlier that he's selling now and it enhances his cash position. But he's at a tough couple of years, so he's using that cash now to clean up all sorts of little problems in his financials, as well as do things that human beings want to do like on a condo in Florida or whatever. They're going to spend some money now again, improve their equipment, buy a new pickup truck, whatever it is. Some of that's going to come to rent. But as I said earlier, it comes in the fall -- this late summer and fall, as we renegotiate those rents. And if it's -- and because we're on only about one-third of our rents turn over in any given year, you don't get to get the rent jump really -- you don't get that rent jump flowing through 100% of the portfolio all in one year. It takes a while. So, it's going to be muted. You're going to see these rents gradually increase. Our overall same-store sales gradually increase. And the underlying factor is what you said, it's trying to stay close to an internally defined percentage of revenue per acre and it's -- we actually have kind of a different number for -- I talk about it in regions, but it's even more granular than that. The highest quality farms have the highest rent per acre as a percentage of revenue and then it waterfalls down as quality declines.

Okay. Thank you.

Thank you.

Your next question comes from John Judy [ph], a Private Investor. Please go ahead.

Yes. I think you answered my question already. It was regarding the preferred. What your thinking is as far as the preferred B, looking at what you're paying on that compared to alternatives as far as converting that or possibly refinancing it.

Okay. I mean, I won't add anything to what I said unless you have a follow-up question, but thank you for being on the call this morning John.

[Operator Instructions] The next question comes from Craig Kucera with B. Riley FBR. Please go ahead.

Hi, good morning guys. Paul, you kind of touched on this in response to one of the earlier questions, but I wanted to circle back to it. It sounds like the leasing spreads that you achieved here in kind of the last fall were relatively flat. Can you give us any color there? And also, given where commodities prices have gone over that time frame, what you think that might translate to here over the next year or so?

Yes. So the lease -- so the leasing spreads in the fall of 2020, late summer and fall. So in hindsight, we did a couple of things wrong and probably a couple of things right. So we leased a substantial amount of those properties, where the negotiations on those leases occurred in August or early September with final contracting in October or a little bit after. If I had known exactly what was going to happen to commodity prices, we would have delayed that cycle. So we were in – we were still in a relatively depressed psychology for those lease renegotiations. And if you looked at the entire universe of farms and you sort of said what did you get ups on and what did you get downs on? We got more ups than downs. But – I alluded to this in the prepared comments. But the ups are all in a 1%, 1.5% rent increases. They're tiny. Recognize that this gets – this even gets a little worse as you think about it in GAAP terms. Many of our leases in terms of the actual cash number we receive have a 1% or 2% rent bump in them. We try to get that in almost every fixed cash lease. But under GAAP straight lining, you don't see that in the GAAP numbers. That's a flat number through the entire period of the lease. So you can see a little ups in the majority of rerentals or rent rolls and then you have a few farms where you end up taking it down. You have a farmer who's really in trouble. You have a piece of land for whatever reason isn't performing really well. And unfortunately, when you take it down, it's not 1%. It's 5% or something like that. And so you end up with a flat kind of rent environment on those rent rolls. One thing – we didn't call this out specifically, but as we saw the fall accelerate in terms of the fall, commodities pricing accelerate and the psychology of farmers change, we actually intentionally delayed re-leasing certain farms. Rent for example – our lease could have expired in late October and instead of rushing to rerent it, we dragged our feet to negotiate better rents than we would have otherwise received. That had a negative impact. We had some "lost months" of revenue in the late – late in 2020, which hurt revenue and AFFO in 2020. In the real cash world, you don't lose any rental income because farmers' paying for that farm during the growing season as a practical matter. We don't "unleased" farm unlike an unleased apartment. You're going to still get the same total rent for that growing season because it's – even though they force us to account month by month that's not how it actually works. So that's what we've seen on the row crop side. If you – if I had to do it over again, I wish we had done all the leases in the last two weeks of the calendar year and get the highest price you can but hindsight is 2020. What we think will happen in the coming year though is that we're in a much stronger position. Culturally, the company gives the farmer that's on the property first dibs. We believe deeply in that principle. It's the way farmland rental works in the private market. It makes a farmer a long-term steward of the property because they think they're going to farm it for decades and that's what we want as landowners. And so we always come back to the farmer. But when we come back around late summer and early fall this time, we're obviously going to be coming with a higher price target. If the farmer meets the target, we keep that farmer on that property. If they do not meet the target, we'll shop it to all other farmers. And this is a zero vacancy asset class. And in flush times like we are in now and we'll be in still this fall we believe, if a farmer doesn't hit the bid, there will be another guy in line ready to. So we think we'll see some pretty good rent roll situation this fall. The one thing again to keep in mind is it's only going to be about a third of the leases on the row crop side that will roll over not 100%. So that's just the reality.

Got it. No, I appreciate that. One other question. The returns from the properties that FDI directly operates has steadily gotten worse over the past several years. Are you looking at any strategic alternatives for those assets, or are you expecting better performance in 2021, given what's happened with commodities?

Yes. So, direct operations, let me just break it into two buckets. There's two different buckets. There's direct operations where we actually farm a farm, because we believe we can make more money on it farming it than we can renting it. We do very little of that. We're not actually going to be doing hardly any of that in the 2021 year. Those were -- since we control them, they were things that, as the commodity prices rebounded, we said let's get these things under lease in the coming year. And we've done that with virtually every, sort of, fully operational grain farm where in fact sell -- we actually own the combine and some tractors and stuff. We're selling that stuff off. The farm economy is such where we might make a little more money operating it, but it's more risky. And importantly, it's a hugely time-consuming thing for the farm management team and for the accounting team. And as we return to a growth strategy and not wanting to increase overheads very much, you got to decide. Are you going to have those people manage actual farming, or are you going to have them go find acquisitions and good opportunities? And so, we're lessening that. Most of what you see in our P&L related to direct operations though is development properties, meaning a usually specialty crop farm where we are replanting all or most of the trees or vines on that property. But in those cases, particularly in the first year of a redevelopment, it's all expenses. If you're in the second or third or fourth year of redevelopment, it's still mostly expenses, but you start to have significant offset to those expenses from the short but existing crop. And I'd say short, because the trees aren't mature. They're not producing as many almonds or whatever it is you're growing, as they otherwise would. So we got just crushed to be blunt on development properties this year, because we control that inventory. And so, what -- I mean we're direct -- it's the way it works, right? There's no way you can get a farmer to lease it from you if it's -- takes more money to operate than you get. But we normally have a significant offset to those development costs, those cultural costs to manage those trees. And this year in the COVID environment, as I alluded, you just -- you own the crop as Farmland Partners and you don't have much of a market for it. Some of that, as we've discussed, will be recoverable, as we sell-through the inventories and the volumes. But, certainly, not all of it. Hope that gives you a little more color on that.

Yes. No, that’s helpful. Thank you, Paul.

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

Great. So, for the first time in several years, all of us here at the company are very optimistic about what the next 12 to 24 months will look like. For new shareholders, thank you for joining us. And even more importantly, for the long-term shareholders, of which, there are many, both individual and institutional investors, thank you for your long-term faith in this company and in this management team. We do truly believe and hope that better times are ahead. And we think you all deserve that. So thank you very much.

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