Farmland Partners Inc. (FPI) Q3 2021 Earnings Report, Transcript and Summary

Welcome to today's Farmland Partners Inc.'s Third Quarter 2021 Earnings Conference Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Paul Pittman, Chairman and CEO, to begin. Paul, please go ahead.

Thank you, Jordan. Good morning, and welcome to Farmland Partners Third Quarter 2021 Earnings Conference Call and Webcast. We truly appreciate your taking the time to join us for these calls because we see them as a very important opportunity to share with you our thinking and our strategy in a format less formal and more interactive than public filings and press releases. As many of you know, Luca Fabbri was recently promoted to President of the company, and James Gilligan was promoted to CFO. Luca, as you all know, was with me at the founding of the company. He and I have worked together for over 20 years on various different ventures. What Luca will do from this point forward is drive many of our growth initiatives across all property types and manage our equity capital markets efforts. James, who is now CFO, was formerly the CFO of Equity International, a private equity firm controlled by Sam Zell. James spent 16 years of his career in various roles in the Zell organization. We are pleased to have his experience and network added into our company. With that, I will turn the call over to James for some customary preliminary remarks.

Thank you, Paul, and thank you to everyone on the call. The press release announcing our third quarter earnings was distributed yesterday afternoon. For those who listen to the recording of this presentation, we remind you that the remarks made herein are as of today, October 28, 2021, and will not be updated subsequent to this 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 third quarter earnings, which is available on our website, farmlandpartners.com, and furnished as an exhibit to our current report on Form 8-K dated October 27, 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 distributed 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, James. So this is a very strong quarter for us, but for the frustrating, continued litigation spend, our revenue was down modestly from a year-over-year quarter, but that's mostly due to asset sales. And as noted in our press release, many of those assets, we still continue to manage, but we no longer directly get the revenue through our P&L. AFFO adjusted for litigation, improved substantially year-over-year. That's consistent with what we would expect with the improving farm economy. The -- probably the most important event of the quarter occurred a few days after the quarter, and that was the conversion of the Series B. That Series B conversion will only enhance the financial results of the company in the coming quarter. The macro environment for Farmland values and farmer profits is incredibly strong. This is the best we have seen since probably 2013 and 2014. In my opinion, the farm economy and, therefore, Farmland appreciation will remain strong for at least another year and possibly 2. December 2022, corn on the futures market is today $5.50, and soybeans for November 2022 are $12.45. Even rolling out a whole year in addition to December 2023, you have -- corn prices are available to farmers that are in excess of $5 a bushel, and soybeans can be sold at nearly $12 a bushel. What that means is that for the sophisticated farmers such as our tenants, they can price not only this 2021 year crop and the 2022 crop and the 2023 crop at strong prices. This means that we're likely to see continued appreciation in land values at least for the next several years. The Chicago Fed has recently reported that Midwest land values are up 10% to 12%. Our point of view is that they are probably up even more than that. The way the Fed collects its data is a little bit backward looking and so already dated by the time they publish it. What we have seen in the markets we're most active in, in Illinois, in particular, is that we believe land values in Illinois are year-over-year up something in the neighborhood of 20%. The farm income and balance sheets, as I said, of farmers are very, very strong and likely to continue to be strong. The last sort of macro market point I want to make is that Farmland as an investment does incredibly well in inflationary environments. And we are, in my view, today entering an inflationary environment that we haven't seen since probably the 1970s. In the 1970s and early 1980s, Farmland appreciated dramatically. We think of the inflation that we're beginning to see the effects of continues that, that same result will occur for Farmland this time. Bringing this all back to the company level, this strong farm economy has led to lease renewals, where our -- on our rent rolls for the row crop portion of our portfolio, we are up 10% plus, and at this point, we have renewed about 75% of the leases that we need to renew this year. The acquisition pipeline is strong. As you may have seen this morning, we announced a transaction in Missouri. That's the first transaction we've done in Missouri. We're happy to add this diversification through putting an additional state in our portfolio. That farm was acquired at a price that will give us about a 4% current yield, and we will see more acquisitions before year-end. We have reinvigorated our loan program over the last several months. We've made now a couple of modest-sized loans, which have a current yield of approximately 8%. This program helps farmers with liquidity when traditional lenders cannot, and we look forward to continuing to expand this business. I have been asked in the past by some in the analyst community, when we have a total return on farms we own that probably looks more like 11% to 13% with appreciation over the long term, why are we happy devoting our capital to a loan program with only an 8% return? And the answer to that really comes down to the fact that one of the challenges in operating this company is that the current yield on assets is modest, and the appreciation is strong. But to meet expectations of our investors on AFFO and dividends and the rest, we would like to blend in some higher-yielding properties through this loan program with that sort of 8% yield target in mind. There are other reasons the loan program makes sense such as helping us participate in states where we can't actually buy land for anticorporate ownership rules or other reasons. But the power of the loan program in a specific sense is this increased current yield. Turning a moment to our NAV, which I focus on almost every quarter. We believe that the -- with all of the Farmland appreciation we're seeing, even with the conversion and the increase in number of shares outstanding, that the NAV per share of our assets today is around $14 to $15 per share. And just a final comment regarding the 2 litigations. This continued spend on the litigation is frustrating to us probably as it is to you. The -- as you know, there are 2 separate cases. We have a case against the Texas hedge fund, who masterminded, in our opinion, this entire thing. They are trying to get out on a jurisdictional basis. We believe they will not be successful in that effort. And the RF admission is incredibly damning of their position when we get to the merits of the case. The RF's admission, the Rota Fortunae's admission, that he made the whole thing up and was paid to do so, plus the other discovery, makes us very confident we will ultimately win on the merits. That case, of course, we can choose to stop pursuing at any point in time if we decide it's not a good business decision to continue. The class action case, unfortunately, is different. We can't stop that case. One would think if there was any fairness in our legal system, this would already be gone. But we were hopeful that after the admission of Rota Fortunae, where he, as I said earlier, was -- admitted that he was paid by a hedge fund to publish the article and that most of the key elements of the article are, in fact, false and were never true, that the plaintiffs and their councils would have dropped this case. They did not do that. So we are faced with no choice but to continue to defend ourselves and our reputation despite the expensive nature of litigation against these frivolous and fundamentally without merit claims. The claims of the class action case piggyback on the statements that Rota Fortunae made. But as I said, we don't have the independent decision to get out of that, so we are unfortunately stuck continuing to fight it. The good news is we think we are close to seeing it ultimately resolved on the merits. We hope that happens in the next quarter or 2, and we can put this and its expense behind us once and for all. With that, I'm going to turn it over to Luca to make a few comments at this time. Go ahead, Luca.

Thank you, Paul. There are a couple of different topics I would like to cover today. The first is the Series B conversion that, of course, you are certainly familiar with already, but I just want to cover a few of the details again. This was a conversion that we did at a price of approximately $12.75 per share -- per common share. While this is a slight discount to our net asset value, it still is a 45.2% premium over the common stock price at the time when we issued the Series B. Also, this Series B conversion brings us a lot of significant benefits. One is the reduced overall leverage of the company. The second is an increased equity market capitalization to over $500 million, potentially bringing us additional demand, especially from passive investors and index investors. This conversion was significantly accretive to AFFO. For example, if you looked at the last full year AFFO in 2020, which was $0.06 pro forma accounting for the Series B conversion, it would have been $0.24, so significantly higher. Also, this conversion was very accretive to cash flow by simply reducing the 6% dividend on the preferred to our common dividend. So the accretion was about $6.2 million on an annual basis. So overall, looking back at this security, we -- it was a very, very useful security for us. It allowed us to raise capital at a time when we, frankly, couldn't through the common stock, through equity issuances and allowed us to, for example, make a couple of very significant acquisitions, one in Illinois and one in California, that we are very, very happy with. So we are happy we had it, but thanks to all the benefits to -- deriving from this conversion, we're very happy it's gone. The second topic I wanted to cover is the Green Street primer that some of you may have read or heard about. So since the inception of the company, we've always struggled a little bit in fully communicate to public company investors, and specifically REIT investors, all the benefits of Farmland investing. And so we decided to actually partner with Green Street, which is, of course, a very highly recognized, a reputable brand in REIT land to really help us convey better the benefits and the fundamentals of investing in Farmland, especially from the point of view of the REIT investor. So while we sponsored this effort by Green Street, it was really the work product, the Farmland investment primer, is really a Green Street work product, and we're very happy it's out there. And it's -- we already found it to be very useful in communicating with investors that are new to the asset class. By the way, both -- a presentation about the Series B conversion with some more details and the Green Street primer about Farmland investing are available on our website. And with that, I will turn the call over to James to cover some key financial highlights. James?

Thanks, Luca. The press release distributed yesterday includes financial and operating results for the 3 and 9 months ended September 30, 2021 and 2020, both as reported and adjusted for litigation-related items. I will share just a few selected metrics here. For the 9 months ended September 30, 2021, total operating revenues were $31.7 million. Adjusted for litigation, they were $31.1 million. Net income was negative $3 million or negative $0.39 per share available to common stockholders. Adjusted for litigation, it was positive $3.8 million or negative $0.18 per share available to common stockholders. AFFO was negative $8.5 million or negative $0.26 per share. Adjusted for litigation, it was negative $1.6 million or negative $0.05 per share. For the 9 months ended September 30, 2020, total operating revenues were $32.7 million. Net income was $1.1 million or negative $0.28 per share available to common stockholders. Adjusted for litigation, it was $1.9 million or negative $0.26 per share available to common stockholders. AFFO was negative $3.2 million or negative $0.10 per share. Adjusted for litigation, it was negative $2.4 million or negative $0.08 per share. As a reminder, our earnings in our business, they're seasonal with a large percentage of variable rent occurring in the fourth quarter. Fully diluted share count as of today is 46,419,864 after conversion of the Series B preferred in early October, as Luca discussed. This concludes my remarks. Thank you for your time this morning. Operator, when you're ready, we would like to begin the Q&A session.

[Operator Instructions] Our first question comes from Rob Stevenson of Janney.

Paul, I didn't see a pricing on the Illinois purchases in the release this morning. 3.5% cap rate, how material was the purchase price there?

They were -- I don't have it right in front of me, but they were modest transactions. The 2 of them combined would be a couple of million dollars at the most, maybe $3 million. I don't -- if somebody in the room here has it, we can say it. But it's modest-sized transactions, which is why we didn't draw them out specifically. And as I said, for Illinois, pretty good cap rates.

Okay. And I mean when you take a look at the -- so you've done the conversion on the Series B. The stock price is up, although pulled back a little bit off of its highs. Given the capital requirements to go through any substantial amount of acquisitions, how are you guys thinking about a sort of a return to a more substantial acquisition level and sort of funding there? Are we likely to see ATM issuance to do that? Are you going to possibly sell some assets to buy some? How should we be thinking about that? And how are you guys planning on financing that going forward?

We're likely to do all of those things at some point in the future. But basically, where we are right now is we have a decent amount of cash. We have quite a few assets we bought all with equity. So we have some borrowing capacity. Fundamentally, the conversion of the Series B is a delevering, if you will, because many people look at the Series B almost as a debt instrument. So we're in a pretty good position to be able to expand in a significant way without further equity issuances. But eventually, we'll need to do further equity issuances. And obviously, the ATM is the most attractive way to do that in terms of the cost of issuance. So I think you can assume we'll make some ATM issuances as prices seem appropriate, but we'll kind of modulate the acquisitions program to stay in line with our desire not to issue equity at deep, deep discounts. This is kind of always an odd time of the year for us. The -- we report third quarter numbers, and it's -- I mean there's just not much going on from this P&L perspective for the company at this point. When we get into the fourth quarter, what you're going to see is the incredible power of having reduced and paid off the -- or converted the preferred in terms of the AFFO per share, then we're also going to see the effect of all the crop shares come in. As you all -- as you know, the fourth -- as you've followed the company for a long time, the fourth quarter is our strongest. So we're hopeful that when you -- we were $12.75 on the 10-day VWAP when we made the conversion. We think that with that conversion, as the overhang that was in the stock from the conversion dissipates, we're going to see the stock trade through that $12.75 and hopefully materially above it because financial performance of the company is only going to improve here in the next couple of quarters. We'll also...

And how are you...

We'll also look at the effect of the acquisitions we've already done, which all the acquisitions kind of post roughly July -- the beginning of July, you're not picking up the revenue until the next year in any meaningful way.

Okay. And how are -- how should we be thinking about the potential here for additional JV acquisitions? How is that going? And are we likely to see more of those deals through the remainder of the -- of 2021 and into '22?

Yes. Well, the opportunity zone vehicle is up into a modest but pretty good-sized scale. I think it has over $50 million of assets in it at this point in time. We, of course, get advisory fees from that. We think that, that will grow and expand in the coming quarters and happy to do acquisitions that way when we can because it lets us further expand the income of the company without having to increase our own equity position in a substantial way. As you probably know, we participate at about a 10% level in most acquisitions the OZ does. But our goal there is really to generate a decent amount of fee income using our advisory capability on those sorts of assets.

Okay. And then the last one for me, the 25% of the leases that have yet to renew at this point, is there anything crop-specific about them, location-specific? Any reason to believe that those aren't -- that those renewal rates aren't going to be similar to the plus 10% that you talked about on the other 75%?

Yes. I think we will -- first, they aren't particularly geographically specific. They're spread around the country a little bit. Human nature being what it is, I am sure that our farm managers are doing the hardest ones last and that's just the way the world works. But we're frankly running at somewhat above that 10% level at this point in time. And when we say we're using -- we think we'll still come in at north of the 10% increase level once they're all redone.

And is there any issue with you guys if somebody were to give it back sort of last minute for you guys to operate it temporarily or ability to find temporary operators for any of these farms in the interim?

No. Finding tenants on the farms in the grain production regions, which is essentially everything but the West Coast, finding operators is very, very easy in this farm economy. We get inbound calls all the time looking for -- farmers looking for additional land. So there's no question there. Obviously, the bench of potential tenants in the specialty crop regions is smaller. It's -- they're more specialized industries. They take a lot more capital on the part of the farmers to run the farms in most cases. So it is a skinnier bench strength as we call it. My perspective is we'd be able to find leases there, but if we couldn't, we would directly operate. We are gradually, in certain crop types, directly operating more farms, citrus in particular, because we find that we can generate stronger returns directly operating than we can with a lease model. What it really comes down to is you just can't capture a high enough percentage of the upside under the lease model. As you probably are aware, many other institutional managers do a cash rent model on the row crops and a direct operations model on their citrus and other specialty crops. And so we're starting to do a little more direct operations, which we think will be positive in the overall results for the year. And -- but that's 2022 is where you'll see that show up.

Our next question comes from Nick Thillman of Baird.

It's Nick on for Dave. Paul, you already commented a little bit about the acquisition pipeline. But I was wondering if I could get a little more color on the row crop, permanent crop mix of that pipeline and kind of cap rates for the different types.

Yes. So the overall cap rate of the company today, everything blended together, is in the low 4s or so. And when I say cap rate, we're talking about purchase price of the farm divided into annual rent. So we're running around low 4s across the entire portfolio. I would think that most of the acquisitions we do in the coming quarters will be in the row crop area as opposed to the specialty crop area. There is a lot going on in California related to water right now and a lot of uncertainty. Some of it is related to changes in the regulatory environment, and some of it is related to the drought they had last year. So we're cautious and careful in California expansions right now as we watch that settle out. We feel like we're in a pretty good position on the assets we own, but it's a good time to probably go just a little bit slower. We will do some acquisitions there, of course, when we can get comfortable that we've got solid water rights. But if our historic portfolio has been 70-30 traditional row crops to specialty, we might move back to 75-25 over -- if you looked at this, again, 6 months from now or so. So won't be dramatic changes, but probably we've got our foot on the accelerator on the row crop side a little harder right now. That reflects what we believe, as I mentioned in the prepared comments, is a multiyear cycle that we've really just started of pretty strong returns to the row crop area. I think you can still make acquisitions right now that before this cycle is over, you will look back on and be quite happy that you paid those prices because I think you're going to see pretty strong appreciation for the next couple of years.

And then turning to 4Q. You kind of touched on the crop share revenues. Do you have a little bit of visibility on that and kind of how you're tracking relative to the same time last year?

Yes. I mean -- so first, if you look at prior years, you will see that the fourth quarter is an incredibly huge part of our total annual results. We would expect that to be the case this year. As far as crop by crop, I don't actually have defined tracking compared to last year. I don't know, James, if you do, go ahead and add a comment, if you'd like.

Yes. I'd say that we're still -- there's still a couple of innings to play out and to see how the harvest comes in and where people are able to sell. One thing we've talked about in the past, in particular, was citrus that was hit kind of hard last year. There were some impacts of COVID that were related to citrus in things like lemons in particular. We've seen a nice recovery in citrus. I think we made some comments earlier in the year that we had expected citrus to do a little bit better, and so far, it has done a little bit better. So I think that's a positive. And we're kind of eagerly awaiting information from our tenants, where available, to understand how the fourth quarter looks.

Our next question comes from Eric Borden of Berenberg Capital Markets.

So given kind of the increased interest in the attractiveness of Farmland, has there been any increase in competition for the farms that you're targeting? Or could you provide any color on kind of the going-in yields? Have they been increasing or decreasing in the current? And then are you seeing any cap rate compression kind of heading into the new year? Any color there would be appreciated.

Yes. So Eric, if I leave off a couple of your questions, prompt me again because there was a couple buried in there. But I just want to give a little bit of a shout-out to you, Eric. Eric Borden of Berenberg, they have begun to write research coverage on us, for anybody that's on this phone call. So thank you very much for paying attention to our company, and we appreciate your commentary and thoughts about the company. So turning to your questions, though, as far as competition. So the strongest competition for the farms is always farmers. It's not other institutions. Particularly true for us, given the way we sort of do our business model. We are much more likely than other institutional asset managers in the farmland space to buy small and medium-sized farms, meaning several million dollars a piece instead of only $20 million transactions. We actually think that's a very important risk-reduction strategy that we follow. And the reason is that if you ever needed to sell the farm, there is always an active group of buyers amongst the farmers, whereas the institutional investors tend to run a little bit hot and cold. Meaning if everything is good, they're buying, and if it's not so good in the farm economy, they aren't buying. So we like those small and medium farms. So that's where the competition comes from. We have a very strong network of -- that brings us a good pipeline. Obviously, we do all the normal things like meet with real estate brokers and monitor what's for sale and attend auctions. But the most powerful engine of growth for us in terms of buying farms is the roughly 110 tenants that we have around the country bring us ideas all the time. Those ideas, in many cases, are off-market or just about to be marketed. So we have an opportunity to pick them up probably before they get fully marketed and hopefully pick them up at a slightly better price than we might otherwise. But -- so we're -- what we're seeing, though, when you go to buy a farm is that it is a competitive environment. But if you are choosy, and we attend many, many auctions and many, many sales and look at many more assets than we buy, you can buy things at strong cap rates, certainly relative to where the market is today. I alluded to 2 small Illinois acquisitions we did that came out with about a 3.5% cap rate for us. Illinois today, in most auctions, is trading at about a 2.75% cap rate. So we found good deals, and we did good deals and are happy with those cap rates. The -- so that's what we're seeing. As far as margin compression goes, the top end of those markets are seeing margin compression in Illinois today, which, as you all know, is our largest state. You are seeing many transactions with price tags between $16,000 and $18,000 per acre. And the highs you had seen before, even within our portfolio, were more like $12,000, maybe $13,000 or so at the high. There had been some occasional $14,000 sales back in 2012, '13, '14 era but not very many. So you've seen this very material jump in valuations. And virtually, everything in Illinois of high quality today is selling at $15,000 an acre or better. We're -- it's hard for us to buy in those markets with those low cap rates, but Illinois is, in our view, sort of the Park Avenue of farmland real estate. So we will continue to nibble at that market. Thank goodness, we already own about 40,000 acres of it, because we want to continue to have a presence there. But yes, prices are high, and rents are reasonably low. But the long-term power of those assets, in particular, in building a stable, diversified U.S. portfolio are important. So we'll continue to buy something there. I hope that answers most of your questions. Follow-up if you need to.

No. No. That was very helpful and thank you for the shout-out. Just real quick and not to belabor the point, but I know in the recent preferred B Series update in the deck there, you kind of quoted a $250 million pipeline. I was just kind of wondering if you could kind of expand on the potential opportunity headed into the fourth quarter and then into 2022. How much of the $250 million is actionable in the near term? And then kind of what's the split between the row crop and the specialty crop there?

Sure. So if we had -- I mean if we had unlimited capital, okay, if I just had a s***load of money, we could buy $500 million of farm ground in the next 6 months with no problem with the staff we have and with the deals we know of. The $250 million is a seriously refined pipeline that we'd largely diligenced and would be happy to acquire if we can strike a deal at the right price. These are -- and that would be a -- we are very, very big on the diversification point. I just want to reemphasize. A lot of people think of us as the row crop farmland REIT. That's not actually true. We are. We have a lot of row crops, but the reason we have row crops is the following: we believe that the powerful story in a worldwide macro sense is gradually increasing global food demand in the face of land scarcity. And if that's what you really believe, that means you build a portfolio that roughly reflects nationwide food production, and you don't try to pick, you chase whatever the hot thing is right now. Is citrus hot or almonds hot or corn hot or whatever it is. You build a portfolio that roughly reflects U.S. food output. That's what we've done, which is in that 70-30 row crop to specialty crop bracket. So going forward, you will see us continue to maintain that sort of diversification. You are likely to see us expand into some new crops and some new states to continue that diversification point even further. It will be a mixture of larger transactions with very, very high-quality, long-term tenants. Probably in crops, they are a little more specialized, maybe things like alfalfa hay that's shipped to Asia or the Middle East in pelletized form. I mean that's an example of something we've been looking at. It's a specialty crop. Returns to those crop types are pretty strong. It's a little bit of a niche market, but it's probably no more risky and probably not quite as risky, frankly, as doing nuts or citrus in California. So they're looking at things like that. We're also looking at a few states in the Northeastern part of the United States. I mean, people often think of the Northeast as not much agriculture. That's not actually true. Places like Upstate New York and Pennsylvania are still strong ag states. And again, it's this story that we truly believe that diversification of the asset class geographically crop-type tenant is important. So we'll continue to do that. As I made -- as I said earlier, when it comes to the specialty crops in California, and this is really true of the entire West Coast, not just California, also Washington and Oregon, some very significant changes recently in the regulatory environment for water. The northeast, meaning Washington State and Oregon, had very, very severe drought last year. So it makes us a little bit cautious and nervous of continued expansion there. We will certainly find deals we want to do where we're comfortable with the water. But like I said, I'd say if you look back a year from now, we will have tilted a little bit less toward the West Coast and more toward the traditional row crops. But 2 years from now, we may tilt back, but at least for now, that would be my judgment. Cap rates, just -- I think you kind of asked that. We really want to try to maintain this average that is north of 4% cap rate portfolio-wide. That's going to get easier and easier to do because the assets we already own, the rents are growing. And if we're already at 4%, and we're turning over 1/3 of the portfolio, and we're adding 10% improvement to those rents, you'll see our cap rate of the existing portfolio gradually increase offsetting, to some degree, the relatively high price environment for new assets that we face. Hope that helps.

No. That's very helpful. That's it for me.

Our next question comes from [ Mark Pludeck ], a private investor.

I've got 2 questions here for you. First one is now that the company has converted the Series B, what's the company's view on their target leverage? Obviously, you have the first-lien loans and debt outstanding. But how do you think about that? And what's the target leverage going to be going forward for the company? Second question is, and this is one I just thought of, why did the company issue 2 million shares via the aftermarket facility at $13.12 and then convert the Series B basically at the end of the quarter or from the beginning of this quarter, technically, at a lower price? I just I'm confused why the company wouldn't have let the equity breathe instead of sell 2 million shares on the open market and get a higher conversion price because it was such a large number of shares in that conversion. So if you could help me understand that particular thought process as well.

Luca, I'm going to turn it to you to address that 2 million shares, at least the facts around it, to the extent you have any comment when -- but I'll start with the target leverage one for a second. So on the target leverage, we -- what we -- the regular first mortgage debt that we have on the farms runs in the neighborhood of 43%. It's been pretty consistent through time. How we get there is that we tend to lever most farms at a 50% interest-only style of debt. And then we have some farms which we do not put any debt on. So you're sort of hanging in that low 40s traditional debt. We still have Series A preferred outstanding. That pays a 3% coupon. We have about another 4.25 years that, that security could remain outstanding. Our current thinking is to leave it in place. At some point in the future, it probably can be converted into equity. But at 3% long-term debt-like instrument, it's a good security, and we're likely to leave it in place. I think we will gradually reduce our leverage over time. The market, as we get bigger, we put on quite a bit of leverage, frankly, to achieve a minimum level of scale that makes us able to cover our overheads because running a public company is expensive. But I think we'd like to be in a slightly lower levered place than we are right now. Exactly what that means probably would mean total debt or debt-like instruments in that 40%, maybe 35% bracket. And we're still quite a bit higher than that when you add our debt plus that preferred security together. Luca, do you want to just reference a little bit? I can give some color, but we did do a little bit of ATM transactions in the quarter. You might just cover that.

Yes. These are actually mainly transactions. We're pretty active in the ATM actually in Q2. In Q3, we did truly a de minimis amount and very, very early in Q3. I mean, look, the way the ATM actually works in terms of true logistics, we work on a -- pretty much on a minute-by-minute basis with the trader that is running the ATM at any given point in time to make sure that whenever we issue shares through that program, it really doesn't put pressure on the stock price. And therefore, I don't think that the fact that we actually sold those shares in Q2 had any meaningful impact on the price. If anything else, sometimes what we observe is that a little bit more trading volume on positive days when we see that there is demand actually attracts even more demand into the stock price. So we were doing it very carefully, as I said, and trying to not put any pressure whatsoever. We were not under any urgency of raising capital, yet, at the same time, we're eager to raise some to kind of leverage some opportunities that we are seeing in the marketplace. So I hope that -- I don't know if -- Paul, if you want add something else.

Yes. We only just -- we covered this in the conference call specifically focused on the conversion, but I want to just add a couple of comments. There is no -- we made that conversion in our own mind as the management team and the Board. We convert with -- the conversion is fantastically accretive when looked at on an income statement or a P&L basis. It is modestly dilutive when looked at on a balance sheet basis, and there's no question about that, and we understand that. We believe, though, with a 6% coupon and the continuing appreciation factor, which when we think when the USDA data comes out clear around next August, it will say 10%, maybe 12% increases in Farmland. That's what we think. So we chose to make that conversion to avoid that big next step-up that we thought in the cost of those -- of that money and to avoid the 6% coupon. We think that the overwhelming income statement accretion will outweigh, over some period of time, hopefully not very long, frankly, the modest balance sheet dilution we took. So it was a judgment call. Ask me a year from now, I'll know if it was the right one. But we think it was, and that's why we did it. Go ahead, James.

Add in one comment, Mark, to your question. When I think ATM, I think of in kind of sources and uses the capital, right, liquidity, growth plans because that's incremental cash that we're bringing to the business. For the Series B conversion, that's really kind of a corporate finance decision. So think of that in kind of cost of capital leverage flow -- a lot of the benefits that Luca mentioned a few minutes back. So although they're obviously both related to the capital structure, kind of different decision points around those 2 mechanics in my mind.

Mark, further questions on...

No. I'm good. I appreciate it, though.

[Operator Instructions] Our next question comes from Craig Kucera of B. Riley Securities.

Yes. Paul, it looks like there was a modest increase in the loan business this quarter. Can you talk about the shadow pipeline of deals you're working on and maybe how much capital you might allocate to that business over the next year or so?

Yes. So here's a long-term strategy on the business, and then I'll answer the short-term questions that you asked. So long-term strategy on the business is to build a book of loans that is in the probably neighborhood of $25 million to $50 million and then to bring in a partner with a lower cost of capital than ours to work with us on that program, thereby materially increasing the returns to us from that 8% level to hopefully mid -- the mid-teens level would be what our target return would be. The program meets a very real need in the marketplace. It puts us in the flow of farmers and farmer deals in some very positive way, can lead to acquisitions and things like that. So the franchise value of that program is strong, but we believe that it's a good program when it's 100% our capital, and it will be a really good program for us from the standpoint of profitability when we get the program big enough to bring in somebody, frankly, with a big pool of capital as a partner, where we can lever our expertise and our investment in some way. So that would be kind of the outlook of the program at a big -- at the high level, the strategic level. Turning to the tactical execution questions that we are facing. The deals we've done now have been in the kind of $2 million to $3 million kind of bracket on the loans. We are looking at substantially larger -- a couple of substantially larger transactions. Our philosophy is that the primary, if not the only security that we are interested in, is land itself, real estate. Maybe a few buildings, but usually just direct farm real estate. That's what we know. That's what we understand. That's what we feel safe lending against. We will take as excess collateral anything else, tractors, growing crops, you name it. But the primary payback security for us is that land itself. So we would like to do some bigger transactions and a blend of smaller transactions. Same logic applies on the smaller. If we get stuck with a piece of property and it's a more modest-sized piece of property, the opportunity to liquidate it if we choose not to keep it in our portfolio is so much better than with the bigger properties. But the big properties, of course, have an efficiency all their own from being able to execute a larger transaction and make a big loan. Like I said, we want to grow it, and we want to find a strategic partner to help us grow it. I think it will be a very powerful improvement tool in terms of kind of the current yield of our portfolio, which is something we're pretty focused on.

Got it. So it sounds like this is probably a multiyear type of strategy. You're probably not anticipating getting there in '22. Is that fair?

Yes. Yes. No, it's multiyear. I would say this time next year, we might be big enough that we can start to find that partner and have -- this is the strategy we embarked on once before, of course, and got sidetracked with the short distort attack. This is an incredibly good product with a lot of potential, and it just fits so nicely with everything else we do. But it will be slow to build that business.

We have no further questions on the phone line, so I'll hand back for any closing remarks.

Thank you very much, Jordan, and thank you to all the participants in the call. We appreciate you taking the time to learn more and hear a little bit more about our company. Look forward to talking with you again early next year after what we think will be a strong fourth quarter. And if there's any questions in the interim, feel free to reach out to the senior management of the company here in Denver. Thank you all. Goodbye now.

This concludes today's call. Thank you for joining. You may now disconnect your lines.