Farmland Partners Inc. (FPI) Earnings Call Transcript & Summary

Good day, and welcome to the Farmland Partners Inc. investor update conference call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paul Pittman, Chairman and Chief Executive Officer.

Great. Thank you very much, and thank you all for joining us today. This is a conference call focused on the conversion of the Preferred Series B that we just announced a couple of days ago and the effects of that conversion on the company and the company's outlook. So first, just quickly summarizing what we did, although I'm sure all of you are aware, we converted approximately $155 million of Series B Preferred into common equity. That common equity will start trading next week. And each holder of the preferred will get just over 2 shares of common equity for each share of the preferred that they had. That increases our total share count by approximately 12.1 million additional shares. So with those facts, turning to what's the impact for the company and the shareholders. This is unequivocally a very good event for shareholders. We will increase AFFO by approximately $8.8 million. That's almost $0.19 a share. What was a 6% dividend cost on the preferred now becomes approximately 1.5% or 1.6% dividend on the cap on the common, thus lowering our at least cash outlay cost of capital. The cash flow enhancement net -- when you net off the new common dividends against the old preferred dividends is $6.2 million to $6.3 million approximately. It significantly reduces the effective leverage of the company because while the preferred is technically an equity security, it was a senior claim to common shareholders. It's increasing our public float by about 35%, which should lead to higher trading volume and liquidity for all shareholders. And finally, it moves us from a dividend which was uncovered to a dividend which is well covered. This improved P&L and balance sheet will open the door for growth in the company. We think we are today at a very good buying opportunity for anyone who wants to come into our stock. There will be many holders of that preferred who are trying to rotate out. They had liked that 6% coupon. And -- but now that they have the common stock, I think there will be selling pressure for at least the next couple of days, maybe for the next couple of weeks. It's hard to predict. But importantly, I think the long-term effect should be a significant improvement in the value of our common equity. This security, the Series B Preferred, it was a good security for the company, but I am happy to see it going. It was expensive. There's no question about it. But with a conversion price of $12.75, which was 45% higher than the stock price at the time we issued the pref, it was a good execution from a corporate finance perspective, and that is particularly true when you think about the assets we bought with that money. Many people thought that was an expensive security, as did I. But I knew at the time we issued it, what we were going to use the money for. And in hindsight, this has worked out quite well. We bought very large almond and other tree nut properties in California from Olam. Those are properties with a very strong cap rate in the 6% plus sort of cap rate in terms of current yield on those assets. We also bought the -- what we'll call the Wilder farms, which were very large transactions in Illinois, about 8,000 acres total in Illinois. And those today are around a 4.9% cap rate in terms of their current yield on those properties. But equally important, the asset values since we bought those farms 3.5 years ago are up at least 20%. So I'm happy we did the deal. But as I said a moment ago, I'm also happy we've gotten that security out of our capital structure at this point. The one negative in the transaction, just to address it head on, I think the net asset value of our stock is in the $14 to $15 range. I think that issuing equity, which is essentially what we did at $12.75 is obviously slightly dilutive from the standpoint of the breakup value of the company. However, when we had to balance that against getting rid of a 6% coupon and continued appreciation, because that was a participating preferred, it seemed to make, on balance, strong financial sense to take that preferred security out of our capital structure, which is why we did it. We also -- if you think about it in practical terms, I think with underwriting discounts and fees, it would have been very difficult for us to do a $155 million offering at an effective price to the company of $12.75. I think we've avoided a very significant level of fees and essentially done a public offering without any fees through this transaction. So we feel very, very good about that, although I wanted to point out that we do recognize it was done slightly below our NAV. Turning just for a moment to the general outlook for the company and the industry of farmland ownership generally. We did a press release a couple of weeks ago where we said our rents appear to be going up in the 10% to 11% range on the rents that we -- on the leases we've rolled over. We've continued to execute a few more leases since that time. That percentage is certainly still holding and we hope will continue to hold. We think there's at least another year of relatively strong farm economics given what's going on worldwide in terms of inflation, crop prices, food demand. Maybe there's another 2 or 3 years. It's just hard to tell, but we're pretty confident that 2022 will turn out to be a pretty strong year for the farm economy. So I think the company is set up right now with an opportunity for substantial additional growth. And before I open it for questions, I do, as I said, want to emphasize, I think this is a relatively inexpensive point for our stock because of the turnover of these preferred holders, some of whom are trying to get out. We have talked to many of them. Many of them are going to continue to hold the equity. They had used that knowing we would eventually convert. Probably they had used that as a way to build a position. But we think there will be some pressure on the stock. And for those of you who want to increase your position, we think this is, frankly, a good time to do it. With that, I'm going to open it for questions and answers.

[Operator Instructions] Our first question will come from Dave Rodgers from Baird.

I guess part of the last comment that you made was about growth and taking the company in the direction of growth. So I guess I wanted to ask a little bit more on that front, if you could and how it is kind of reducing the leverage and adding the liquidity here, in your mind, increase your ability to grow the company. And are you positioned now at the right leverage levels for acquisitions going forward?

Yes. I think we are positioned at the right levels for acquisitions going forward. So as far as growth goes, there's -- what you see in the market today is an incredibly high volume of farms that are for sale. This always happens. When the market is strong for Farmland, the volume jumps. And when the market is weak for Farmland, frankly, the volume declines substantially. It's one reason that it's a little hard just to judge from price. You got to think about the volume in the market as well. The other factor that occurs when volumes are strong and farm prices are high, is the very best assets get sold only when prices are high. When prices are low, the assets being traded will tend to be that one farm that somebody owns that isn't that great and they're trying to spruce up their own balance sheet by getting rid of a piece of land, but they're not selling by any means their crown jewels. What happens is when prices are strong, you pull into the market some very, very high-quality assets, and they trade at strong prices, unfortunately. But if you really want to buy the best, you got to be active in the markets like this, and so we're trying to be. So turning to the capital structure. I do think we've probably gotten our leverage in a place that's more acceptable to the public markets, straight with asset value appreciation. On strict book value basis, our regular debt is probably in the low 40% leverage against the value or the purchase price of those farms. But many regions of the country are probably going to be up 10% to 15% in the next 12 months if they haven't moved that far already. So that really takes our leverage against true asset value, our debt against true asset value down into the 30% range. We still have Pref A. Pref A will likely stay outstanding for some period of time. It's a 3% dividend rate. It does not have a participating feature. So we think it's a good security and we'll probably leave it out there for a while. So we are in a position where I think we have the cash flow now to borrow additional capital if we need to for acquisitions. We have quite a bit of cash on the balance sheet at this point in time. We've got a strong pipeline in front of us for the remainder of the year. So we're -- we feel real good about the growth. We'll have to see what goes on with stock price in terms of whether we would consider equity issuances in the future. And right now, I'm focused on getting a stock price that's quite strong. As you all know, I'm still a large shareholder and will continue to be. So we want to see the stock price come up but grow at the same time. But right now, we have cash availability and borrowing capacity if we need it to grow pretty substantially.

Our next question will come from Dane Bowler from 2nd Market.

So this conversion of the Preferred B takes the market cap of FPI common up to approximately the threshold for inclusion in the VNQ ETF. Have you been in contact with the index guys at all to see if or when you're going to get added?

We have not been in contact with that group specifically, although we have reached out to some of the various index guys to discuss inclusion. After this call, I will actually ask Luca to reach out to you, and any details or insights you have, we're happy to make. We want to be included in every index and every ETF we can. We think it's good for shareholders and good for the company.

Our next question will come from [ Mark Bluedeck ], a private investor.

Paul, I wanted to ask about the Rutledge refinance that you're going to need to do, the loans are due in April of 2022 from what I've read. There are $112 million. I wanted to get your thoughts on that now in light of the conversion of the preferred and the deleveraging.

Yes. The Rutledge loans are -- they're in process for refinancing. We don't anticipate any challenges of getting them refinanced. Our borrowers are quite happy with their positions, in general, today. Our lenders, the folks we borrow from, I mean, they're quite happy because, number one, they like this conversion. Number two, they like what's going on with asset value, which is their ultimate -- they're all individual mortgages, so that's their ultimate protection. But we've begun conversations on managing through that debt refinance and/or repayment. It's frankly going to turn into a refinance, we believe, 6 months ago or a year ago, even. So it's just -- it will come off without a hitch. I can't predict the details yet, but not really very worried about it.

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

Yes. So a couple of things. Thank you all for joining us today, and as I said in my prepared remarks, this is a very good event for the company. So happy to talk more about it. One other thing I just wanted to point out because I think it's important is, for many of you, if you want to go to our website, we commissioned an industry primer with Green Street, the well-known consultancy to real estate investors, generally. And we've posted that on our website to make it publicly available to all shareholders who would like to read it. I'm sitting here with [ James Gilligan ], one of the senior executives in our finance team. James, where would people go to find that on our website? Just please speak up and say so.

Yes. Good morning, everyone. Really, it's on the home page. There's a link right up front.

Yes. And it's a several-hundred-page report or 100--page-plus report, I think. It's pretty long and detailed, but I think it really does tell the compelling story about the asset class because it's really about the asset class, not our company specifically. And I think investors will appreciate reading that. So if you want to, feel free to go find a copy of it. With that, we'll conclude. Thank you all very much.

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