Good morning. Thank you for attending today's Farmland Partners Q1 2022 Earnings Call. My name is Bethany, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]. I would now like to pass the conference over to our host, Paul Pittman, Chairman and CEO with Farmland Partners. Please go ahead.

Good morning, and welcome to Farmland Partners First Quarter 2022 Earnings Conference Call and Webcast. We appreciate you 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. I will now turn over the call to our CFO, James Gilligan, for some customary preliminary remarks. James?

Thank you, Paul, and thank you to everyone on the call. The press release announcing our first quarter earnings was distributed yesterday afternoon. The supplemental package was posted to the Investor Relations section of our website under the sub header presentations and other materials yesterday afternoon as well. For those who listen to the recording of this presentation, we remind you that the remarks made herein are as of today, May 4, 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 first 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 May 3, 2022. The 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 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. Paul?

Thank you, James. So I want to make a few prepared comments about our quarter we'll look forward to your questions in the Q&A session as well. This was obviously a very strong quarter for the company. Essentially, we have the wind at our back on all the major drivers in our business. Land prices of the assets we already own are surging higher -- this has also led to more sales and revenue in our MWA Auction and Brokerage division. Rents, especially in the row crop area are increasing substantially. We have now renewed around 25% of the leases that will need to be renewed at the end of 2022 and we are seeing rental increases in those renewals in the 15% to 20% range. The underlying Farmland profitability is very, very strong, despite higher fertilizer prices, the increase in grain price is more than compensates. All of this is fundamentally caused by increasing food demand and decreasing availability of high-quality Farmland. But on top of that general long-term trend, the profitability of the farmer and therefore, the strength of our business has been accentuated by poor weather in South America, a reduced crop in India, now potentially late planting in the United States and of course, the unfortunate war in Ukraine, which is limiting Russian and Ukrainian exports. These things are driving grain prices and farmer profitability higher. And they benefit our business, however they are from a societal perspective, disappointing circumstances, at least for the poorest people in the world. For FPI, these factors are showing up in the strength of our P&L. This is most clearly evidenced by the almost 200% increase in AFFO per share. The strong operating results are complemented by the significantly reduced costs coming from the way we finance our business. We have substantial savings from the conversion of the Series B last fall that are now showing up in the income statement. We have savings from significant debt reduction. And in addition, after defeating the class action lawsuit, our legal spend should decline in the future. I'm happy to report that this has led the Board of Directors to vote for a 20% increase in the dividend because of these strong results and our positive outlook for the future. Our pipeline remains very strong. We anticipate doing further acquisitions that will create long-term value for our shareholders. With that, I'm going to turn it over to Luca for a few prepared remarks.

Thank you, Paul. We have seen at this time, a very, very significant amount of investor interest in Farmland as an asset class in general and in our company, in particular. This amount of interest is driven certainly by some very, very long-term factors and characteristics of the asset class, namely the stability and the characteristics of the asset class in terms of appreciation potential driven by very fundamental macroeconomic factors. There are also some more specific factors driving this interest right now at this juncture in time, for example, the fact the Ukrainian conflict has really heightened the perception and the reality of the value of producing stable food crops in a truly geopolitically stable area of the world, such as the United States, especially when some of these this Farmland in the United States, like in the U.S. Midwest is some of the best in the world and the most productive in the world. And then there are also the other factors related to price and productivity and so on and so forth that Paul recently outlined. Also, Farmland has historically been a very, very good hedge against inflation. And of course, at this point in time, there is a lot of interest investors in that particular characteristics of Farmland. Another structural kind of factors attracting interest to Farmland and to our company, is the intrinsically ESG and sustainability friendly nature of the asset class. We are -- we have embarked the company in a journey to better formalize our approach to ESG and sustainability. And you should see a little bit more from us here in the near future, but we really kind of focused on the definition of sustainability around ESG specifically that starts with -- yes, with the social aspect and really focusing on how…

Thank you, 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 presentations and other materials. Pages 1 through 9 of the package contained the press release and related financial information. And Pages 10 through 20 contain the supplemental information. First, I will share a few financial metrics that appear on Page 2 for the 3 months ended March 31, 2022. Net income was $1.1 million compared to $2.5 million for Q1 '21. Q1 2022 net income included $0.7 million of gain on dispositions of assets, down from $3.4 million in Q1 '21. Adjusted for litigation, net income was $2 million compared to $5 million for Q1 '21. Net income per share available to common stockholders was $0.00 compared to negative $0.02 for Q1 '21. Adjusted for litigation, net income per share available to common stockholders was positive $0.02 compared to positive $0.05 for Q1 '21. AFFO was positive $2.1 million compared to negative $1.6 million for Q1 '21. Adjusted for litigation, AFFO was $3 million compared to $0.9 million for Q1 '21. AFFO per weighted average share was positive $0.04 compared to negative $0.05 for Q1 '21. Adjusted for litigation, AFFO per weighted average share was $0.06 compared to $0.03 for Q1 '21. Total debt at March 31, 2022, was $465 million, with further reduction of $16.9 million after the end of the quarter. Fully diluted share count as of April 29 was $51.4 million. Next, I will draw your attention to Page 12. As Luca mentioned, we have received many questions over the past couple of months regarding Ukraine. I'll make comments on Ukraine a few minutes ago, so I won't go into depth here. However, we…

Operator, we're going to go to Q&A, and then we'll conclude after we see if there are any questions from the audience. Thank you.

[Operator Instructions]. Our first question comes from the line of Nate Crossett with Berenberg. Please go ahead.

Hey, good morning. Thank you. I had a question on just the deal flow in the pipeline. I don't think you guys gave guidance for kind of acquisition volumes for the year. But you did $8 million in the quarter. There was a presentation you put out recently that showed that you had $18 million under contract, and it was kind of sizing the pipeline at around $330 million. And so is there any way you can just give us a sense of what we can expect in terms of volumes this year? Or what the activity looks like over the next three months? And then also, if you could just maybe comment on cap rates and if you're seeing any changes in pricing just given the change in interest rates over the last few months?

Sure. A bunch of different questions there, Nate, and I'll try to answer them all. If I miss one of them, please prompt me again. But our pipeline today is as we said in our presentation, probably $300 million or more, we track a lot of transactions compared to the number we actually do. We try to measure ourselves more by doing the right transactions, then focusing on a very specific quantity of transactions. We want to be selective do the best deals. And the best deals is really balancing a variety of things. It's thinking about the portfolio balance in the context of what we already own. It's thinking about cap rate we can get on a given asset, which is different in different regions. And then finally, and in many ways, the most important to me is what is our perspective on the long term measured in 5 years or greater upside on a given farm. We want to buy the very, very best farms. And we are now being rewarded for that discipline during the last half a decade or so. And that's really what drives which farms we do. We won't do $300 million of new acquisitions by the end of the year in any -- under kind of any case, but we're going to do quite a few. The next surge in acquisitions is likely to come in the fall because in the fall is when there will be a lot more properties available for sale than there are right now kind of entering a phase where it usually slows down a little bit because it's harder to transact on a farm when there's crops in the field as it creates a set of other deal issues you have to manage. Our perspective, though, is we'll do something in the tens of millions of deals in the next quarter. And it will kind of run, I think, at roughly that pace. But don't be surprised if it's quite a bit higher or even quite a bit lower than that because really, we're driven by selectivity and doing the right deals. So the other question you asked is are we're seeing price changes due to interest rates. And so far, no, we are not. So many farm acquisitions are done with cash. A Farmland as an asset class overall only has about 13% leverage on it. Many, many of these buyers show up with cash available for the transaction. Obviously, for those farmers who are using debt in the purchase they're likely to pull their horns in a little bit because, obviously, it increases the cost of carrying that asset. But as I said, the overwhelming majority of the sort of farmers or institutions making these acquisitions, are doing it with cash. And so the increased debt is not really having an effect at this point in time. I think I got most of your questions. But if I missed one, feel free to follow up.

No, that's definitely helpful. I had a question on the renewal spreads. I think last quarter, I can't remember if you guys were kind of articulating 10%, plus or minus, but the 15 to 20 that you quoted this time did seem like it was an uptick. And I guess my question is like how far out are you going to kind of see those spreads? Or what are you kind of anticipating, is this a 2022 phenomenon? Or is this an 18-month to 24-month phenomenon? And I guess like is there any resistance on kind of resetting those rents? Any color you can give there is helpful.

Sure. So just to give everyone the general context, as a company, we reset rents in annual cycles. So what I said on the last call was that the reset cycle that is now showing up in our profit and loss statement for the 2022 calendar year was in that 10%-ish sort of range. That’s what we experienced. Where we are now is we're starting to renegotiate leases that will kick in, in the 2023 years. We are doing that a little bit early, frankly. Normally, we would do it in the late summer and early fall of this year. But we started early for the following reason. We've a very favorable price situation for farmers and the farmer -- if we have renegotiated that we will rent that farm to that farmer for another three years, starting he knows he's got that lease for '23, '24 and '25. That farmer can go out right now and sell grain and hedge the risk but he cannot take -- you cannot put that hedge on if he thinks he's going to lose that farm. So we wanted to start early for the benefit of our tenants as well as ourselves in this cycle of negotiating the 23, 24 and 25 rent package. What we're seeing there is that we're getting kind of a 15% to 20% increase in those rents. As I've said, we’ve now released about 25% of what we have to do this year. And those rental increases are quite strong and higher than we were getting last year. I think that will continue through this entire lease cycle. I think it's likely to continue when we start to renew the leases, that will be up for renewal in 2024. So I think this is going to go on…

Yes, it’s very helpful. I leave it there. Thank you.

Our next question comes from the line of Dave Rodgers with Baird. Please go ahead.

Hey Paul, good morning. Thanks for the increasing disclosures on the company as a whole. Wanted to ask one of the most attractive features, obviously, of Farmland over many years has been the generally 100% occupancy of the farms. I wanted to talk about your direct operations business, I guess, in the sense that it is growing. And you talked about it growing again this year. So can you kind of dovetail the direct operations component in with kind of this 100% occupancy and high demand from farmers?

Yes. So we do direct operations under two circumstances. We do it when we have a farm that's sort of in redevelopment for some reason, -- maybe it needs new irrigation installed. We just bought it and we're going to improve it with irrigation and we might direct operate it. Maybe it's bulldozing trees and changing the crop the specialty crop we have planted there. It's very hard to lease a farm that's not sort of in good conditions, so to speak. So that has historically been the direct operations we have done. Most other institutional managers of farmland use a lease model in row crop and a direct operations model in their specialty crops. The reason they do that is the volatility of your return is high enough that it's relatively hard to get a fair lease in place on the specialty crops. And what I mean by that is, in fairness to the farmer who might lease it, he's always cautious because of that volatility. So getting a fully fair return over the kind of 5-year or so average is difficult because what you're going to end up with -- if I'm going to lease a farm, I want to base rent. I want a significant base rent. And I want that in exchange for giving up the upside that you get from direct operations. The farmer, of course, says that's all great, but what about the downside year where he's really coming out of pocket and taking a loss on direct operations. So what -- like so many other institutions that we've decided to start doing is at least on some of our specialty crops on citrus in particular. That we're going to direct to operate them because we think we will make more money over time than we will from leasing it. And it's really kind of aligning us with, I think, what other long-term managers in the space have done. We have not actually done it, though, on all of our specialty crops, and I don't think we will. We have the relationship with the Olam Company, which is specialty crops but truly a long-term triple-net lease at a great rate. They maintain the trees, they pay the taxes, they do everything. And we still get something against our original purchase price that's in the mid-6s as a cap rate. That's great. But Olam is a unique company with a very strong balance sheet, publicly traded in Singapore. And so we were able to negotiate a lease with them that on balance, gives us a pretty high return and a fixed rent or nearly fixed style rent. And that -- but on the citrus, we just -- we found ourselves unable to get that fixed rent we wanted, and we've all reserved. And so we think we're going to capture much more upside in the -- by direct operating. Hope that helps, Dave.

That does, Paul. And then maybe a related question around the crop insurance proceeds in the quarter just under $2 million. I assume that was related to last year. I guess a couple of questions. One, was that in the guidance originally? And then two, would you anticipate this year actually being able to harvest the crop related to that. So maybe I don't want to say double counting, but you get kind of 2 shots added this year? Or will we see kind of a crop insurance number again next year? How is that kind of working in your guidance and in your outlook?

I'm going to let James take that, at least initially. I may add something afterwards. But go ahead, James.

Yes, Dave, so the crop insurance numbers that showed up were -- yes, they were in our original numbers. And that's crop insurance in lieu of selling the fruit that was anticipated. As we look out into next year, we don't yet have visibility as to how that's shaking out, but we will include that in numbers as we do our work for 2023.

Okay. And then last for me, in terms of the rental increases that you guys are seeing. I think this year, if you looked at just the fixed same-store component you're up about 2.1%. It seems like on the farms, and that makes sense relative to your roughly 10% increase. So I guess just kind of translating that to next year if 25% or so of the leases are rolling and you're going to get a 15% or 20% increase. I mean the organic growth rate next year should be in that 3% to 4% range. I mean is that the right way we're thinking about it?

Go ahead, James.

Yes, it's still early days, but I think that's essentially the math that we do. As Paul said, we've renewed some percentage of leases this year. We have a lot more to go. And so we'll keep you updated, but I think that's essentially the math that we do as well.

And if I was updating your model right now, Dave, I'd be using the 15% number, not the 20% number, just to be cautious. We're shooting for the 20 million but no guarantees yet. We've only renewed about 25% of the acres at this point.

Great. Very helpful. Thank you.

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

Hi, good morning guys. And congrats on putting a lot of the legal issues behind you. But I'm curious, Paul, are you in the process of contemplating any sort of pursuit of a recovery related to that?

Yes, there -- yes, we are, Craig, and it's actually a good question. One reason that you didn't see us take all of the elevated legal spend away. We do believe that the class action lawsuit against the company is gone and done at this point. So we're very happy about that. We will continue to pursue the hedge fund that was behind all of this and are hopeful of getting a significant recovery at some point in the future. But it's a very big deal to have the case against us fully dismissed. We always believe that, that was frivolous but it did create financial risk to the company if we would ever have lost that case, which we never really thought we would, but you never know. And then on top of that, it's a case you can't get out of, it's a case against you. We can make a business decision at some point in the future if we choose to, to stop pursuing the hedge fund to get back what they cost us but we can do that on a business basis at the time. In other words, do we think we can achieve more than a cost to continue to pursue it. That just wasn't the way it worked in the class action. We had to stand there in the ring, so to speak, and keep fighting. And obviously, we're successful.

Great. That's helpful. And at this point, are you able to sort of contemplate what that recovery might be? Or are you still sort of restricted in what you can disclose in that matter?

It would be very hard for me to quantify it both because it's an ongoing battle. And I also -- it would be a very broad range. If I tried to quantify it. I mean the damage caused by this is significant, but I'm not going to be able to go into details.

No, that's fair. You raised some additional equity here in the second quarter, pay down additional debt. Most of your debt is relatively long -- has a relatively long maturity. Can you comment on which portion of the debt capital stack is sort of priority for paydowns?

Yes. So when we think about paydowns on our current debt structure, we think about it really in the following way. We think about what's the absolute rate on that piece of debt. What is the alternatives we could use the cash for if we have really good deals in front of us, we'll continue to do transactions without levering them? That's in effect from an overall balance sheet perspective, similar to paying down debt, frankly, because you're delevering overall. We will also look at when there is a reset on rates because a lot of our debt instruments will might be a 10-year instrument, but it may have a reset every three years or so. So if you're coming up with a reset in the near future, on one of our depths given what's going on in the background interest rates. Generally, you would think about trying to accelerate paying down on those debts that are going to reset. And then the final thing we think about, which is really important, is thinking about what collateral is underneath a given loan because if we can free up a lot of collateral, it gives us an awful lot of financing flexibility. So we're very cognizant of creating this relatively large package of assets with no pledge against them because it opens up all kinds of more efficient ways for us to finance the business going forward. So that's how we balance it.

Great. That's helpful. Just 1 more for me. I mean, thinking about how you converted the Series B last year into common you raise more common pay down more debt. Are you viewing the recent deleveraging is sort of giving you dry powder for additional acquisitions to lever back up? Or are you thinking that you want to run the balance sheet with maybe a little bit more -- less leverage over time?

I think it's actually both. It gives us the financial flexibility to really grow the company when there are good opportunities, because we've got a lot of liquidity capacity should we need it. But our general trend is to have slightly less leverage over time than we have had historically. The leverage we had -- we took the point of view that to support the overheads on the company you needed to achieve relatively significant scale. And frankly, we're still a modest-sized company by any measure on Wall Street. But we really wanted to get to a good, big base of assets because you can't run a public company without a pretty solid staff and a minimum number of people. So we've used leverage to be able to keep that growth growing and to get big even without doing with equity. We want to continue to grow. We want to grow aggressively. But I think we are now at a point where we can probably do that growth with slightly less overall leverage ratios. This company, if you look at the preferreds as a debt instrument, and it's not technically correct, but some people do look at it that way. We have massively delevered this company in the last 12 months on an overall basis when you look at it that way. And we think that's good, and we think it's 1 of the things that's helped our stock price. So we're positive about it, but it's always going to be a balance. But long term, I think you'll see lower overall leverage levels than you have seen in the past on the company.

Okay.

There are no additional questions waiting at this time. I would like to pass the conference back to Paul Pittman for any closing remarks.

Thank you. And thank you for all the investors and listeners on this call. We do appreciate your continued support of the company. And we look forward to talking with you either in-person or on the next quarterly conference call. Thank you very much.

That concludes the Farmland Partners Q1 2022 Earnings Call. I hope you all enjoy the rest of your day. You may now disconnect your lines.