Farmland Partners Inc. (FPI) Q3 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for your patience and thank you for attending today's Farmland Partners Inc. Third Quarter 2022 Earnings Call. My name is Amber and I will be your operator for today's call. [Operator Instructions] It is now my pleasure to hand the conference over to our host, Paul Pittman, Chairman and CEO of Farmland. Paul, please proceed.

Thank you, Amber. Good morning and welcome to Farmland Partners third quarter 2022 earnings conference call and webcast. Thank you for taking the time to hear these further insights about our business beyond those expressed in the public filings and press releases. I will now turn the call over to our General Counsel, Christine Garrison, for some customary preliminary remarks. Christine?

Thank you, Paul and thank you to everyone on the call. The press release announcing our third quarter earnings was distributed earlier today. The supplemental package has been posted to the Investor Relations section of our website under the sub header Presentations and Other Materials. For those who listen to the recording of this presentation, we remind you that the remarks made herein are as of today, October 25, 2022 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 is furnished as an exhibit to our current report on Form 8-K dated October 24, 2022. 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 today and in documents we have filed with, or furnished to the SEC. I would now like to turn the call to our Chairman and CEO, Paul Pittman.

Thank you, Christine. This was another very strong quarter for the company. Revenues were up was up. AFFO was up $5.7 million. Operating income was up over 200% compared to Q3 of 2021. The operations primarily benefited from increased rents on our fixed leases, largely in the row crop arena, increased auction and brokerage fee revenue and lower litigation expenses. We think this trend will continue for the fourth quarter as well. Farmer profitability is high and will remain high. This is driven by modest shortages of the primary commodities around the world, the continued unrest in Ukraine and weather challenges in Western Europe, South America and the United States. Land appreciation has been extremely strong over the past 9 months and was even stronger in 2021. We think, in 2023, the rate of appreciation may slow but it will continue to be a strong year for Farmland values. As far as the company’s liquidity position goes, we have today approximately $120 million of available liquidity. This puts the company in a strong and secure position no matter what comes in the overall economy. We think the farm economy, in particular, will weather the coming storm quite well. But we and all investors are nervous about the outlook given the recent rates of inflation and increased interest rates. So we wanted to be well prepared no matter what comes our way. With that, I will turn it over to Luca Fabbri to make a few comments.

Thank you, Paul. I would like to kind of drill a little deeper into a topic that Paul touched on briefly which is farmland values. As we already talked in prior calls, we have been seeing quite strong appreciation in the asset class in the last 18 to 24 months. After the -- our most -- our prior call, investor call at the beginning of August, the USDA released its annual land value survey which we regard as the most reliable and consistent throughout the country basis to evaluate trends in real estate values in the farmland sector. So I just want to quote some of the numbers that USDA came up with in terms of appreciation and I'll quote a couple of different numbers. One is year-over-year appreciation in the last year and one is the appreciation over the last 2 years as a total not as an annual number. So Illinois was up in the last year 12.7%, 20.3% for the last 2 years. Iowa was up a blistering 21.5%, 33% over 2 years. Even the -- in states like California that are seeing some drought challenges, values were up 10.1% over the last year and 20% over the last 2 years. Nationwide, farm real estate values went up 12.4% in the last year, 20.3% in the last 2 years. So these are -- just a couple of reminders, these stats are really for all types of farm real estate so all quality tiers. And our anecdotal evidence that we see in the marketplace is that perhaps the upper tiers of farmland values and quality are actually appreciating even at that faster than that. By the way, also, if you go and look at the actual USDA statistics, please remember that the values per acre that you see in those statistics are really, again, across all quality tiers, while we tend to focus really on the upper tier of quality of farmland and therefore, the values that we pay per acre are not really comparable to the values quoted by USDA. And more importantly, you can use the values by the USDA and multiply by the number of acres that we own in the state to come up with portfolio values. But again, USDA value -- USDA's numbers are incredibly valuable to really estimate appreciation trends. Since the publication of the USDA numbers, we are continuing to see appreciation in farmland values, however, perhaps at a less blistering pace, largely due probably to interest rate increases. The largest buyers of farmland are still farmers. They're strategic buyers. They are largely cash buyers but they do use leverage from time to time. And as Paul was saying, their economics, their P&Ls this year are very, very strong. Most farmers, especially in row crops, have already largely secured some crop sales for next year, for 2023. And as Paul said, we are expecting strong farmer economics for next year. So we expect these farmland values -- the appreciation, perhaps, to slow down but to remain sustained into next year. So drivers of this appreciation trends, again, it's farmer economics but also the fact that productivity, thanks to technological advances, continues to go up every single year. But in the last -- in the 5 years prior to the last 2, we had really seen sideways appreciation, 0% to 2% kind of range and therefore, there was a lot of potential appreciation of pent-up potential appreciation in the marketplace that there has really come to the 4% [ph] in the last 18 to 24 months. I also want to kind of make a couple of quick comments on our potential acquisition activity in the near future. We have a lot of liquidity available to us mostly in the form of available lines of credit. But capital is very expensive. That is expensive because our stock price equity is very expensive and therefore, you can expect us to be a lot more selective in our acquisition activity but it will continue. Whenever we see especially attractive opportunities, we will jump on them. And those attractive opportunities are either in the form of potential return expectations, either in terms of cap rate or in terms of potential appreciation or both but also due to other kind of more strategic factors. For example, if we see the opportunity to buy a farm that is very close by or even contiguous to something that we own, we will continue to jump on those opportunities because they really enhance the value of the whole kind of local portfolio across the board. And with that, I will now turn the call over to James Gilligan, our CFO, for his overview of the company's financial performance. James?

Thanks, Luca. I'm going to refer to the supplemental package in my comments. As a reminder, the package is available in the Investor Relations section of our website under the sub-header Events and Presentations. Pages 1 through 10 of the package contained the press release and related financial information and Pages 11 through 21 contain the supplemental info. First, I will share a few financial metrics that appear on Page 2. For the 3 months ended September 30, 2022, net income was positive $1.1 million compared to negative $2.7 million for Q3 '21, an increase of $3.8 million. Net income per share available to common stockholders was positive $0.01 compared to negative $0.17 for Q3 '21, an increase of $0.18. AFFO was positive $2.5 million compared to negative $3.2 million for Q3 '21, an increase of $5.7 million, as Paul cited earlier. AFFO per weighted average share was positive $0.05 compared to negative $0.09 for Q3 '21, an increase of $0.14. The improved performance was due to increased revenue, reduced legal and accounting expense and reduced distributions on preferred stock. Cost of goods sold was higher in 2022 due to the greater number of farms under direct operations in 2022 compared to 2021. G&A expenses were higher in 2022, largely due to the acquisition of Murray Wise Associates, or MWA as we say internally, in late '21. For the 9 months ended September 30, 2022, net income was positive $5.2 million compared to negative $3.1 million for '21, an increase of $8.3 million. Net income per share available to common stockholders was positive $0.05 compared to negative $0.39 for '21, an increase of $0.44. AFFO was positive $5.8 million compared to negative $8.5 million for '21, an increase of $14.3 million. AFFO per weighted average share was positive $0.11 compared to negative $0.26 for '21, an increase of $0.37. Similar to Q3, the year-to-date performance is due to increased revenue, reduced legal and accounting expense and reduced distributions on preferred stock, partly offset by an increase in cost of goods sold due to directly operating more farms and an increase in G&A expenses due to the acquisition of MWA in late '21. Total debt at September 30, 2022, was $410 million. Since December 31, 2021, we reduced net debt by over $80 million. We repaid an additional $5 million of Series A preferred within the quarter. The balance of Series A preferred was $109 million as of September 30, 2022. Fully diluted share count as of October 21 was 55.8 million shares. Next, I will turn to Page 14 to provide an overview of our income statement. On the calls in the first 2 quarters of 2022, we took a couple of minutes to review the different components listed out on the table. I won't go through the entire table on today's call, just a few highlights. But if you have any questions, please feel free to follow up with me. The items to highlight are: this table on the graphs on the following pages show direct operations on a gross profit basis, revenue less cost of goods sold. Thus, the total is shown or total revenue less cost of goods sold. For fixed farm rent, 50% to 100% of the annual leases paid before planting, generally in the first quarter, thus, we are positive from a working capital perspective for a large portion of the year. We have one large variable rent contract for approximately $6.5 million that is very well covered by farm revenue. The lowest risk parts of our business, the fixed payments plus the 1 large variable rent contract that I just mentioned, comprise over 80% of the total of the items listed revenue less cost of goods sold. The charts that follow on Page 15 show the values of the different categories described on Page 14 for Q3 2022 compared to Q3 2021. You can see the fixed payments, variable payments, direct operations, gross profit and other items. The total in the right-hand column is revenue less cost of goods sold. Q3 '22 was $11.4 million compared to $9.7 million for Q3 '21. Further down on Page 15, we dive deeper into the fixed payments and variable payments creating a bridge from Q3 '21 to Q3 '22. For fixed payment details, we separate out the performance of same row crop farms from the other items such as acquisitions, dispositions, permanent crops and the farms that were noncomparable between the periods, same row crop farms and row crop farms in the portfolio before January 1, '21. We view same row crop farms as the best way to remove the noise in the various activities that are grouped into the other category here. As you can see, performance was up $0.2 million from Q3 '21 to Q3 '22. Fixed payments associated with acquisitions, dispositions and other items is up $0.9 million. One reason for the large increase was a solar project that started its construction phase within the quarter. We expect that project to become operational within the year -- the next year, excuse me. In variable payment details, we remind listeners that the vast majority of cash and revenue occurs after harvest in the fourth quarter. The variance in Q3 is largely in line with expectations. The positive variance in tree nuts is due to the pecans in the Southeast. The negative variance in citrus is due to the citrus farms being under direct operations and therefore, not generating variable rent in the quarter. The decline in all other crops is largely due to a farm that was sold in 2022 and therefore, not part of the numbers for 2022. The charts on Page 16 show the same information for year-to-date 2022 compared to 2021. On the top 2 charts, you can see the fixed payments, variable payments, direct operations, gross profit and other items. Again, the total on the right-hand column is revenue less cost of goods sold. Year-to-date '22 was $34.8 million compared to $30.4 million for year-to-date '21. Further down on Page 16, we show the fixed payments broken out in the same fashion as the previous page. Same row crop farms were up $0.6 million from year-to-date '21 and year-to-date '22. The fixed payments associated with acquisitions, dispositions and other items was up $1.7 million. For variable details [indiscernible] year-to-date '21 to year-to-date '22 shows tree nuts were down which is really a Q1 item caused by Q4 2020 after-harvest revenue slipping into Q1 of 2021, while Q1 of 2022 did not benefit from any revenue slipping from the previous quarter. Citrus is down due to no citrus farms under third-party leases paying variable rent in 2022, offset by a lagging final payment from the 2021 crop year that was received in the second quarter. Grapes were down in Q1 caused by timing and also lower performance. All other crops was down due to the farm that was sold in 2022. On the next page, Page 17, we update the outlook for 2022. The table starts with the same categories described on Page 14, fixed payments, variable payments, direct operations, gross profit and other. Fixed payment increased due to new acquisitions and leases signed. Variable payments decreased due to pricing on tree nuts and lower yields on grapes. Direct operations gross profit increased due to higher projections for crop insurance and increased projections for the remaining citrus and blueberries crop sales in the fourth quarter. On the expense side, G&A decreased by approximately $0.3 million due to the accounting treatment of the noncash incentive associated with the Murray Wise acquisition in late 2021. That noncash incentive was added back to AFFO. In addition, various other items are trending lower than forecasted on our last update. Weighted average shares increased due to the share of sales under the company's ATM program. This results in AFFO in the $14.3 million to $16.1 million range compared to $13.4 million to $15.6 million range that we shared back in July. AFFO per share is in the range of $0.27 to $0.31 compared to $0.26 to $0.30 from back in July. This wraps up my comments for this morning. Operator, you can now begin the question-and-answer session.

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

In the release, you guys said that you’ve renewed 60% of the 2022 lease expiration. Can you talk about what’s going on with the remaining 40%? And are there certain crops or geographical areas where the lease discussions more challenging at this point?

So 60% renewed at this time is frankly on pace with what we would expect. We're not anticipating any difficulty. I think we'll end up with renewals in excess of 15% increases across all row crop regions. So the renewal process going fine. A lot of these leases haven't even expired yet. Farmers are busy in the field [indiscernible] but there's nothing.

Okay. And then, Luca, given the comments that you made about increases in farm values, how are rental rates increasing? Are they in line with that, above that, below that increase in farm values? How are you characterizing that?

Yes. I'll just take this one. Luca, feel great to add to it if you want. Obviously, when you have rapidly accelerating farmland values, you have some level of rate compression going on because rents don't reset quite as fast. That being said, we're seeing very large increases on farmland [indiscernible] group was formed now that we got of $450 [ph] sometime. Those are unheard of numbers for the last year or 2 but we are seeing rapid appreciation of farm rent but does not quite as [indiscernible].

Okay. And then I guess -- sorry.

Go ahead. Go ahead.

No, I guess my follow-up to that would wind up being, how should we be thinking about acquisitions right now given that, right? The values of the farm are increasing. The rents are increasing but may lag a little bit before you get a full catch-up that's basically meaning the cap rates are decreasing on a nominal basis here. And so your cost of capital is going up from the debt side, especially. How are you guys thinking about deploying capital in the back half of this year and early '23 at this point?

Rob, as I mentioned, the -- we are -- because of the cost of capital issue, we are being very, very kind of careful. However, also keep in mind that we think of our acquisitions as a total return model [ph]. We see that if we have slightly lower cap rates for a period of time to let the rent going to catch up permanent values, we are still fundamental believers of the long-term appreciation potential as we are the asset class. We do look at cap rate because we are a public company and we have to get quarter-to-quarter reporting obligations. But generally speaking, we are not going to be that much [indiscernible]. However, the cost of capital is the major driver right now for us as we think about acquisitions. That's why I said that we are being seemingly selective and we are going to do acquisitions probably during this period of time in the near future but it's going to be on a much lesser scale.

Okay.

I just want to add one thing to that. I've been doing this now for 25 years or so. What is the absolute -- that depreciation more powerful section [indiscernible] farmland industry current. So the 2 high-quality farms [indiscernible] while you own them, not a lot of operating costs as a landlord [indiscernible]. As we drive growing and fundamentally, the compounded appreciation of the asset value 5% or 6% on average. It doesn't come in [indiscernible].

Okay. And then a question on the balance sheet. Several of the MetLife loans and then I guess the Rutledge facility also has adjustment date in ‘23, the early part. Can you talk about what happens to the rates on those MetLife term loans? And then what your expectations are for the Rutledge facility when that rolls?

Rob, I think you have a kind of background noise. I'm going to answer the question but if you could use [indiscernible] it would be helpful. I don't know where that -- it could be coming from the operator but it's got a lot of scrachiness. we've had this question from a couple of other investors as well as in terms of debt resets. We do have a substantial amount of debt resetting during the calendar year. I forget the exact number but it's excess of $150 million. It's a substantial amount of debt reset. Some of those debt instruments will be repaid from cash flow probably but we certainly can't repay them all from cash flow. So as far as the rate resets that occur, most of those are loans with MetLife. The MetLife loan agreements permit us to fully repay those loans at the reset date. So we have quite a bit of negotiating leverage to shift to a different point on the yield curve or to repay with money borrowed from a different lender or negotiate with MetLife. MetLife largely has the authority to set that rate wherever they want, sort of guided by what they’re doing or similarly situated borrowers in the rest of their portfolio. We’ve been through this process with MetLife before. They are quite fair in how they do that. They’re looking at the same forward curve we are. That being said, I think we should all expect some level of increase in these interest rates at those reset date. I think that’s just the reality. We are coming off of rates that were set 3 years ago or so and virtually any duration, any instrument of any type. When it resets it would be at a somewhat higher rate. The exact number of the resets is impossible to tell because there is no absolute formula. It’s really sort of discretion of the lender and because we have the right to repay within our discretion…

And just to add to that, Rob, on the Rutledge, it's the spread that resets on the anniversary of that facility and the sort of ranges from 1.8% over SOFR to 2.25%. Right now, we're 1.95%. And it's an EBITDA-based test kind of based on where the numbers are coming out. So where we think given some improvement in operations, we might jump into that top tier to lower that spread, or we might kind of stay where we are.

Okay. Operator you want to go to the next question?

Yes. Our next question comes from Gerry Sweeney with Roth Capital.

I just wanted to make sure you can hear me. But could you remind me -- I know you went through 60% of your farms that are up this year are -- have been renewed to 40% to be determined. But what percentage of your total farms roll this year? Could you remind me for that?

Yes, we roll approximately 1/3. I don't have the exact number but approximately 1/3 every year. I think this is a year where we're slightly less than 1/3 but don't hold me to that but it's always right around 1/3 because the most common lease in our portfolio is a 3-year lease. So it's just the math. We usually have about 1/3 renewing in any given year.

Got it. I thought it was just a little bit lower as well so I just wanted to see if we any material lower. A couple of different various questions. Murray Wise were coming up on a full year. Just curious as to how this acquisition is -- internally how you felt about it and sort of hitting that stride and not only a little bit more revenue but I think part of the reason that it gives -- opens up some opportunity for maybe some purchases. Again, I get that maybe acquisitions potentially slowing but just curious if MWA sort of opening up the opportunity for some… Yes.

A 12-month look back on that acquisition is that's probably the very best acquisition we've ever done in my entire life. From the standpoint of performance, in the first 12 months, it has performed at a higher revenue and profitability than we frankly expected. We hope that continues. It's obviously great to buy a real estate brokerage business into a rapidly rising strong farmland market. But the performance of that business from a financial perspective has been outstanding. The performance of that business from the standpoint of giving us broader reach and more opportunities to acquire properties and hear about properties that are for sale without carrying the overheads inside Farmland Partners of that staff has also been quite good. So we have nothing but kind of positive things to say about that acquisition and how it's going.

Is there an opportunity to maybe pivot a little bit and invest a little bit more in MWA if acquisitions become a little less palatable, for the lack of a better word?

Well, palatable is the wrong word. We're very sensitive though to maintaining a reasonably strong cash flows in a higher -- in a rising interest rate environment. So the answer to your first question is, yes. We would continue to grow the Murray Wise business. We would grow that both in terms of farm management but we will also grow in terms of the brokerage and auction side of the business. I think the growth will come both possibly through small acquisitions. We have done a tuck-in acquisition to expand that business in the last 12 months. It was quite modest. So it's not something that a lot of people are focused on but we did grow through acquisition but we'll also grow it organically and hire more team members for the Murray Wise business which we have done. And I would anticipate in the 2023 calendar year, that, that business is a slightly bigger percentage of our overall revenue and profitability than it was this year. That's a business hard to predict exactly what will happen because it's a real estate brokerage business. But we think, given what's going on in the market, it will be modestly improved performance from that business next year compared to 2022.

Got it. And then I’ve spoken with you in the past -- forecasts, not just 2023 but obviously, we’re in a very good up cycle. We had the Ukraine-Russia war. I think, we have -- some data is coming out, looking at some increased yields, supply-demand imbalance. And like I said, I think 2023 looks very good. But what are you seeing a little bit further out on the curve? And obviously, you’ve been through multiple cycles but just curious where you think we are in this one and what you’re seeing to -- past 2023, per se?

Sure. So look, both the positive and the negative cycles in farmland and the farm economy and to be frank, I think we've talked about this before. On farmland itself, it's not really a cycle. It's a surge and then a plateau in asset value and then a surge and another plateau. Farmland, for all the reasons we've discussed about scarcity and other things, don't -- doesn't really go down in value. And you'll see headlines that suggest that. What happens in the real world is when the land values and the sales prices pull back, number of farms for sale collapses. So you're only seeing in a downturn is distressed sales. And it tells you nothing about what it would take to actually buy a farm from someone who's not in distress. And those numbers are -- more or less stay flat during that downturn. So that's important to note. But on the general farm economy, meaning crops and farmer profitability, what happens is those cycles are 3 to 5 years long, in general. 5 is a long one, 3 is a little bit of a short one. I'd say we're 1.5 years or 2 into this one, this market turnaround in the farm economy. The -- I expect it to go on for at least the 2023 year. And what I mean by that is that grain prices will be high. I don't know if they'll be as high as they are right now but they will be compared to long-term historical averages pretty strong in the 2023 year. The reason for that is that we've got carryouts in the primary crops, corn, soybeans and wheat, that are relatively low by long-term historical standards and they cannot get fixed overnight. It would take a bumper crop and probably 2 or 3 of the major growing regions in the country in the same year to completely fix that. And so we're at least a year away from being in a surplus of the grains and probably more than a year away. The other important though, characteristic about farmer profitability you've got to keep in mind is that the successful and capable commodity farmer has sold forward most of his '23 grain at this point, or at least a significant percentage of it and maybe some of it is 2024 grain. So even when the cycle turns, the very best farmers, of which -- that's who we have as tenants, they will have insulated themselves from the first year or 2 of the market downturn when it finally comes. We saw this in our rent growth and collections and issues like that back in the last cycle which sort of ended in 2014, summer 2014 is when the kind of cracks in grain prices showed up. We didn't really struggle with -- they never got very high but slightly increased bad debt or having a hard time getting collections on the days they were due from our farmers until about 2017. So sort of 2 years where everything was still great because of those forward sales. And then to the extent we struggled at all and again, we did -- this is an asset class with very little bad debt, that was all sort of '17, '18, maybe '19. It just didn't happen right away. So that's how that cycle worked. And I don't know when we go into the downturn cycle but I don't think it's any time -- it's not right in front of us yet. That's for sure.

Got it. And you sort of touched upon and this was one of my final question. So I was just curious if you know how -- what percentage of your farmers sell forward the crops? Obviously, I don’t think they’d do 100% but they do a decent portion?

We don't survey that exactly and there's obviously some different forms they can do that. But I would say that the overwhelming majority, almost all of them on the row crop side are selling at least some portion of their crops forward. I'd say 2023 year, best practices, they probably marketed somewhere between 30% and 50% of their crops already for the 2023 year. And for the 2024 year, they're probably lower than that or like 20% or so. But it's an appropriate marketing practice for top producers is to use those forward markets in a way to insulate their downside. Now they may rule it, they may trade it, they may put options, there's all sorts of different strategies. But these guys are not going completely unprotected on commodity price when the prices are good like this. If they were disappointed in the price, they might not market very much. But if the prices are strong like this, they are marketing a substantial portion 6 to 18 months in advance.

Our next question comes from Dave Rodgers with Baird.

Wanted to follow up on the refinancing. And I realize that the rates still have to be set by your lenders at some point next year and you’ll pay some off. I guess, though, James, just to kind of put it in reference maybe to the numbers that we’re looking at today. When you look at like third quarter next year versus third quarter this year on a like-for-like basis, I mean, could that increase in interest expense be in the 20% to 25% range? Or is that not -- is that kind of off the table?

Well, I guess I think about it a couple of ways. One is just thinking about where kind of base rates are moving. So if you look at -- If you look back in time at treasuries, SOFR, LIBOR, whatever it is and you look where it is today and on in the future, you can see that sort of the trajectory. And we're frankly looking at those same curves. So that's in the market. I think everyone is looking at that information. We don't know exactly where they're going to reset but we're trying to take in the data, talk to our lending partners and understand where they're seeing pricing, frankly, as early as we can. The exact mechanics in these resets don't allow that much advanced pricing. It's kind of at the time. So I think we'll assess it as we go in but we're certainly seeing things higher. And, Dave, we're looking at the curve just the same way you would.

I think I would just add to that.

I appreciate that.

I think, Dave, you got to remember, not all of our borrowing is resetting. There is a substantial amount of borrowing that's still locked in at very favorable rents. And then as you recall, we have over $100 million of preferred security that's at a 3% dividend yield as well. So a big piece of our -- debt side of our balance sheet, nothing is going to change. That being said, nobody should sugarcoat this. There are great operational things happening in the company but the increase in interest rates is not going to be a positive factor for the company in the 2023 year. But we're not particularly worried about it. We'll just managed through it. I mean it's -- I think you got to always remember, I mean, that what's driving the interest rate increases is inflation. Inflation is more directly tied to farmland value appreciation than it even is to interest rates. So the key driver of wealth creation in our asset class isn't interest rates. It's a land depreciation. And that inflation is driving that land depreciation and will continue to do so. So you got to -- we got to take the good with the bad. -- cash flows will suffer a little bit but farmland values will continue to push forward strongly.

Got you. I wanted to go back to the acquisition pipeline. I think you guys have walked the line between kind of being opportunistic but more cautious. And do you have a pipeline of acquisitions we would anticipate you should be closing? Is there something, a number that you've got embedded in either the guidance or where you'd like to achieve by the end of the year.

Yes, we do have some acquisitions in the pipeline. I would characterize it as being quite small.

We're starting -- we saw this -- we started kind of in the summertime we slowed down a little bit on our acquisitions process. But, look, we commit to somebody who aren't going to buy a farm or an asset from them, we're going to follow through and do that. We don't try to back out just because interest rates got higher. So we've got a continuing pipeline of transactions we're going to close. Luckily, a lot of those are in pretty strong cap rates just because of the nature of the sort of assets we were buying. And we'll continue to do tuck-in acquisitions of properties right next door to something we already own, for example, because that always improves the long-term value of the portfolio. But I mean, we are -- our farm managers know this. I mean, we are at a slower acquisitions pace than we were 6 or 12 months ago. And I think that's appropriate given the cost of capital.

And just to follow on, I think echoing what Luca and Paul said about just kind of maintaining discipline. Our outlook, we don't include deals we haven't closed. So as we close things, these numbers would change a little bit.

Helpful. And then last, maybe, Paul, for you from a high-level perspective and I’ve discussed this often. But you made a great case today of why you want to own farmland near term, long term, values don’t typically go down in the farmland business. Economics today are pretty good. You anticipate rents to continue to improve next year, even at a decelerating pace, not very interest rate sensitive. Why is now -- and take the cost of capital out of it, maybe for a minute. Why is now not the time to just put your foot on the accelerator and buy as much as you can? I understand debt costs are rising but I also see a stock price with a 57 [ph] multiple on it which pretty much makes anything you buy accretive today on an equity-only basis. And I would say, as we all look around REIT land, that’s the exceptional right time to buy as much as you possibly can. And so when you say that we’re going to be more cautious but there’s no risk and everything is going up, it just kind of maybe sets aside some of your comments earlier. So I wanted to give you the chance to address it because it does seem like there’s a great opportunity to use equity here to grow the platform, grow your business for all the reasons that you said today.

Yes. No, I mean I think if you could promise me that unfettered growth would be rewarded, I think we would do that. But I don't think you can promise me that. I mean we've now been public for 7 years and I'll tell you, we haven't been rewarded for really aggressive growth. We've been awarded for value creation and that is sort of the sure thing. I say this as a -- still, I don't know whether I'm the third or fourth largest shareholder today, I'm still a large, large shareholder. We believe that we are trading at a modest discount, frankly, to what the stock is worth. If you liquidated all the properties we have, that set of assets is owned by our current group of shareholders we don't really want to dilute them. We’re not scared of issuing a modest amount of equity to do a very specific acquisition because it’s an add-on acquisition or it’s a very great deal or it’s a cheap price for some reason. We’ll do it. But we’re just -- despite the multiple we trade at, if we think that the liquidation value of the underlying pool of assets is in excess of the place the stock is trading at, it’s hard to put our foot on the accelerator. We may be wrong, right? But it’s really hard because there is -- our stock price took a big dip here in the last 2.5 months. None of that was related to anything going on in this company. And we just put out a surprise, I think, in terms of our earnings release which kind of proves the point. But that just makes a really aggressive -- the public markets don’t see -- and REITs in particular were not getting as separated from the reality of the rest of the REIT industry and the general economy as we should be in this cycle. It’s one of the challenges of being a public company. But that being said, we’ve got our eye on growing fundamental long-term value for our shareholders which means you do pay attention to underlying asset value. So that’s kind of where we are and why we come to this sort of balanced approach. Operator, any further questions?

Our next question comes from Craig Kucera with B. Riley Securities.

I may have missed this but are you expecting any crop losses related to Hurricane Ian?

No, we really don't. We've only got a handful of farms in Florida. All of our farms were affected a little bit by high winds and rain but no meaningful -- I'm looking at the management team here, no meaningful, measurable damage specifically related to that event. It probably isn't on balance, great for the crops but we -- our farms just, because of their geography, didn't happen to get hit particularly hard.

Okay, great. And Paul, you've spoken in the past about the lack of leverage in farmland as an asset class and how that's kept the lid on cap rate expansion. But I'd be curious, has that changed at all here in the third and early here in the fourth quarter, just given the more meaningful move in interest rates? Or are cap rates still remaining pretty sticky?

Cap rates are very sticky. So there’s just not a lot of leverage in the farmland acquisition side of things which is one reason that these increased interest rates haven’t led to an immediate sort of flattening of the appreciation of farmland. I think the statistic is always hovering right around 13% borrowing against the total pool of farmland in the United States. That’s just an incredibly low amount of leverage overall. So many of these farms are being bought with cash or with embedded equity. If they borrow at all, they’re taking the embedded equity in farmland they already own as a farmer and then using that to purchase a new farm. So there’s nominally debt on the farm but it’s really already kind of paid for from the appreciation on their other farms. So it just isn’t quite the immediate change in valuation of the underlying asset due to higher interest rates that you might be accustomed to in other asset classes.

And to add on to what Paul is saying, we're also not seeing owners of farmland that have levered up at a very high level that are suddenly going and selling in distressed levels due to rising rates which you might expect in other asset classes. We're not seeing that because, as Paul said, the level of leverage is pretty darn low to begin with.

Yes.

Got it. And just one more for me. I know earlier in the year, you thought you would probably be looking to buy it around a 4% cap which would be presumably below where your floating rate debt is right now where you have so much capacity. I guess when you think about acquisitions and I know you mentioned it would be a small number of acquisitions, are you looking at that as, “Hey, we need to have a positive spread on the cost of debt day 1,” Or do you look more at it from the perspective, again, of more of it -- this is a total return vehicle or most to be of the upside actually related to appreciation?

We are absolutely driven as a total return vehicle. That's how we think about it. It's how I've always thought about it. It's the asset class, it's out frankly, the smart money in the sector thinks about the asset class. That being said, you've got to carry your debt, right? So you can't completely ignore high interest rates when you're thinking about an acquisition. So what does that mean in practical terms? Like we said it, we truly believe the long-term appreciation case. We'll go do that acquisition without regard to the current yield. But you just can't do too many of those because you got to make ends meet, so to speak, in terms of your P&L. But the flip side is, when we do bump into an acquisition that today is 5% or 6% and there are occasionally those sorts of opportunities, yes, those will carry themselves on our cost of borrowing at this point in time. And we’ll do more of those and less of the ones with a lower current yield. But we’re always total return focused, not -- no yield hogging here. It’s about total return.

There are currently no further questions in queue. [Operator Instructions].

I don’t think there’s any more, operator, unless somebody came in.

No, there are no further questions in queue.

Great. Well, thank you all for joining us for this call. We appreciate your continued interest in our company and we look forward to updating you on our activities and results in the coming quarters. Thank you very much.

This concludes today's Farmland Partners Inc. third quarter 2022 earnings call. Thank you for your participation. You may now disconnect your lines.