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spk00: Good morning and welcome to the Farmland Partners, Inc. first quarter 2021 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Paul Pittman, Chairman and CEO. Please go ahead.
spk06: Thank you. Good morning and welcome to Farmland Partners first quarter earnings and conference call and webcast. We always 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 strategy in a format less formal and more active than public filings and press releases. With me this morning is Luca Fabri, the company's chief financial officer. I will now turn the call over to Luca for some customary preliminary remarks.
spk01: Thank you, Paul, and thank you all who are listening to this webcast live or recorded. The press release announcing our first quarter earnings was distributed earlier this morning. A replay of this call will be available shortly after the conclusion of the call through May 27, 2021. The phone numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 13, 2021, and have not been updated subsequent to this initial earnings call. In the investor relations section of our website, you can find a presentation with supplemental information that we will refer to during this conference call. During this call, we will make forward-looking statements, including statements related to the future performance of our portfolio, our identified and potential acquisitions and dispositions, impact of acquisitions, dispositions, and financing activities, business development opportunities, as well as comments on our outlook for our businesses' rent and the broader agricultural markets. We also will discuss certain non-GAAP financial measures, including net operating income, FFO, adjusted FFO, EBITDA RE, and adjusted EBITDA RE. Definitions of these non-GAAP measures, as well as reconciliation to the most comparable GAAP measures, are included in the company's press release announcing first quarter earnings, which is available on our website, www.farmlandpartners.com, and is furnished as an exhibit to our current report on Form 8K, dated as of this morning, May 13, 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 this morning before market open 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 Pinman. Paul? Thank you, Luca.
spk06: So today I'm gonna discuss a couple of different things. The first quarter results, I will also discuss some of the macro factors going in the market generally, and I will also discuss our continued effort to shift from a position of asset sales and stock buybacks to a more growth-oriented company. So first, starting with the highlights of the quarter, and Luca will go into these in more detail, but this is really a very strong quarter for us. but for the litigation expense. Just to give you one metric and one comparison. In the first quarter of 2020, a year ago, adjusted for litigation, we had approximately 300,000 negative AFFO. In Q1 2021, adjusted for litigation, we had approximately 900,000 positive AFFO. That's a very significant swing. There are a lot of different things going on in those numbers, and as we always caution, quarterly numbers are jumpy and volatile, but it is certainly a very strong positive move in the right direction and demonstrates what we think is the beginning of a multi-year cycle of very strong quarterly and annual performance in the portfolio. We have begun in the first quarter in earnest to shift the company back to a growth mode as discussed in the 2020 earnings call back in March. Prior to that, we were in asset disposition and stock buyback mode, but we started to discuss acquisitions and other things to put the company back on the growth path. We really began that in the first quarter of this year as our press release indicates. We started an acquisition program again. We bought about $2.9 million of assets. We bought those assets without any debt. We bought them entirely with equity, which is part and parcel of our desire to gradually de-lever the company. Speaking of leverage, we reduced our debt by $20 million and bought back some amount, frankly a slight amount, of the Series B preferred. We will continue that effort in future quarters to further delever the company. We also finished the setup and started to establish substantial AUM in the off-balance sheet vehicle related to the Opportunity Zones. We will continue these growth and deleveraging strategies in the coming quarter. Our goal is to increase the scale of assets under management, both off balance sheet and on balance sheet, so we can spread the overheads of the company over a bigger asset base. We will continue to reduce leverage, as I have mentioned, and we believe we will be able to substantially increase rents in the coming quarters, as we have about a third of the portfolio we'll roll over this summer and fall, and we think we'll be in a position for very strong rent increases on those new leases. Turning to net asset value for a moment, I think we are now right in that sort of $14 per share range of net asset value. I think it is gradually going up. It's really difficult to measure absolute property value increases on anything shorter than an annual basis. You know, it's just not enough statistical data, but we think we're in a position where we're going to see land value appreciation for the year come in pretty strong and continue for several years in the future. Turning to the slides that we have on the website, it's under, to refresh your memory, it's under the investor relations tab of our website. farmlandpartners.com, I want to touch on just a couple of sort of macro themes that are really important to the company at this juncture. So the first slide on page three is a slide we presented last quarter, but I start almost every presentation with this slide. This is the most important thing about the farmland asset class. We are seeing gradually increasing food demand driven by population growth and GDP per capita gains in the developing world against a massive decline in tillable or arable acres per person across the world. This trend should continue for a long, long time. It is at this point set, you know, it's measured in 50-year increments at this point in time We do not think it will change, and this is what really drives the long-term value gains for farmland. But we are also seeing elevated, in the more near term, elevated farmer profits, which in our view will be here for several years. What is behind that is a demand-driven bull market largely driven by Chinese and other Asian demand for foodstuffs out of the United States in particular. But that demand-driven bull market for the primary food commodities is exacerbated and strengthened by a slight hiccup in productivity that began late last summer in many of the growing regions of the world. We've seen incredibly strong price recovery in the key commodities, we think we are set up for several years of very strong profitability for farmers. So what we have is sort of two sources of wind at our back. One is the general trend of increasing food demand and land scarcity, which really goes on all the time. And on top of that, at least for the next few years, very strong profitability increases for farmers. Turning the page, just to talk about that income increase for farmers. This is a page called Demand Growth and Productivity Gains. What we have mapped on this page is for both corn and soybeans, based on mostly USDA data, an approximation of kind of the profitability in each year that a farmer experiences on the two different crops. And then on the far right-hand side of that graph, we took the 2020 years, the most recent years where we have actual numbers, and we said, what does that look like if you just change commodity price for the corn and the soybeans? And we did it in two different ways. We looked at corn in the context of two different pricing scenarios, one of which was $5 a bushel and the other of which was $6 a bushel. December corn now is just under $6 a bushel. It was a little bit over a few days ago, to give you a frame of reference. And then we did the same thing on soybeans, and we looked at soybeans at $12 and $14 a bushel. And when you look at that, and these are the two bar charts on the far right of the page, you see an incredibly strong increase in per acre profitability for these farmers. Using corn as an example, it's quite realistic to think that a farmer will get something in the neighborhood of $200 to $250 an acre more profitability this year maybe in some cases as much as almost $400 an acre of increased profitability. Soybeans, of course, are not quite as strong, but the story is similar. This drives farmer optimism, drives farmers' acquisitions of equipment, and certainly drives farmers' acquisitions and interest in expanding their operations. So this is a very important factor. We believe it will last for several years, although there is certainly never any certainty about that. Turning to the next page, I mentioned earlier in my remarks that Chinese demand for foodstuffs in particular is a large, large driver of these changes in commodity prices, but also a large driver of global increases in food demand. And the chart here on this page just sort of demonstrates that. There is today, and it's already mostly in place, frankly, on shipments already made, but there is an expectation that corn imports into China will grow by 300%. from the 1920 marketing year to the 2021 marketing year, which is the one we're in today. Some sources estimate it could be as high as 400 percent. This is just an example and, frankly, the most extreme example in corn, although relatively strong increases in the other key commodities, soybeans, the soy meal, soy oil into China. This trend, we believe, will continue as they rebuild their hog herd in particular and change the way they feed that livestock. Then turning to the final slide in our presentation, and I put this slide in because it is so timely. In fact, when I read the papers and things this morning, it's a key topic in the business news, is that we really are on the brink of, if not already, experiencing inflation. Despite the way the Fed may look at inflation, when you look at many different durable goods and assets, we are already seeing quite a bit of inflation. The graph on the page is, frankly, quite noisy. The blue line is inflation, and the red line is farmland appreciation. you know, there's some data collection issues in the way the USDA pulls this data together, but if you smoothed that red line, what you would see is what it says in the far right-hand column of the table, that there is almost always a positive and pretty significant spread between farmland appreciation and inflation. Fundamentally, farmland is a very good hedge against inflation. We think that farmland valuation and investors will benefit from exposure to farmland because of this sort of well-set trend in positive spread to inflation. Turning to sort of one last comment that I want to make, You know, this previously discussed Rota Fortuna litigation, which is costing us quite a bit of money per quarter, will eventually end. We think you and the market should expect elevated spend on those cases to continue for at least a couple more quarters, but it will end eventually, and we believe it will end with success. So before I turn it back to Luca, just to summarize, we think, frankly, a strong quarter, beginning of a new growth phase for this company, and we will continue to move forward on that vein in the next quarter. With that, Luca, you can go with your remarks.
spk01: Thank you, Paul. As Paul has mentioned just now in his remarks, we feel that the company's performance in this quarter was actually quite strong. However, the financial results were really clouded by the significant legal and accounting spend, specifically the legal spend related to the Rota Fortuna litigation. So in a bit of a departure from past practice, I will mention now some of our performance also excluding about $2.5 million of Rota Fortuna litigation-related expense that we incurred in the first quarter of the year. So for the quarter, we recorded total operating revenues of $11.6 million as compared to $11.7 for the same period in 2020. So again, pretty strong performance considering our portfolio has shrunk a bit over this period of time. And in the same two comparable periods, this year we recorded total operating income of 3.1 million versus 5.3 in the same period of 2020. However, adding back those legal spend, as I mentioned, the performance this year would have been 5.6 million. In the quarter, we recorded basic net loss to common stockholders of two cents per share. we would have had a net income of $0.07 per share without those litigation expenses as compared to net loss of $0.09 per share in the same period of 2020. And finally, for AFFO in this quarter, we recorded a negative $0.05 versus negative $0.01 in the same period during 2020, but this year it would have been a positive $0.03 per share. performance without those legal expenses. In the quarter, we repurchased about 8,300 shares of Series B Preferred at about $25.82 average price. Subsequent to the end of Q1, we purchased an additional about 16,800 shares at $25.98 average price. So totally, since the beginning of the year so far, we have repurchased 25,073 shares of CDSB Preferred at an average price of $2593 for a total of approximately $650,000. Finally, on the debt side, in the quarter, we repaid approximately $20 million total in debt. Of that, $10 million was a prepayment just not related to any to any specific asset dispositions and therefore our need to free up collateral. As of today, the total fully diluted share count is 32,319,978. This concludes my remarks. Thank you for your time this morning and your interest in Farmland Partners. Kate, we would like to begin the question and answer session.
spk00: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. The first question is from Rob Stevenson of Jani. Please go ahead.
spk05: Good morning, guys. Paul, what determined the 14 dispositions? Was that attractive pricing? Was that farms and or crops that you wanted to reduce exposure to? Was there any significant concentration in terms of those farms in terms of crops or location?
spk06: Very good question, Rob, and I probably should have covered it in the prepared remarks. The big driver, I think, almost 21 or 22 million of the roughly 28 million of dispositions were the assets we contributed into the Opportunity Zone Fund. So we still maintain management fees on those assets. It's part of our effort to expand our AUM. So the Opportunity Zone Fund was seeded with some of our own assets. Further growth will probably largely come from third party, true third party acquisitions of properties that we don't own today. But that was the big driver. The remainder of the dispositions were really things we already had deeply in process before we kind of made that shift from asset sales and stock buybacks back to growth. And, you know, we want to be perceived in the marketplace as a very good counterparty in sales and purchase transactions. So, you know, you're always, when you make that shift, you're already so deep into a transaction. Counterparties have spent money on diligence, things like that. And we basically went ahead and finished those transactions up because I think it's the ethical and appropriate thing to do.
spk01: And, Rob, by the way, just Paul used the term contributed. Those were actually sales. Ninety percent of the sale price actually came to us in cash, so it generated cash for us to redeploy otherwise. Good point, Eric. Good point.
spk05: Okay. And then what are you getting in terms of fees off the asset management business? How should we be thinking about that? you know, either revenue off the existing $21.5 million or as a percentage of what you're likely to get as you grow that, and what level of expenses are going to be associated with that?
spk06: So I don't know if we have this in the public domains. I don't think so, but I can frame it for you without giving you an exact number. We receive from the Opportunity Zone vehicle fees based on assets under management, So, you know, whether it's levered or unlevered is irrelevant. It's based on assets under management. And those fee levels are set to be modestly in excess of the overheads of the company today running it as a public company. So the profit margin for us running a private vehicle with the same essentially cost and charge is pretty beneficial and pretty powerful to the public vehicle. If you need further information on that, Rob, feel free to call us later, and I'll check the documents and see what we have in the public domain, and I maybe can take it a little farther for you if it's important to you.
spk01: Also, to add a little bit to what Paul said, if these OZ funds were to scale up significantly, we might eventually have to incur additional expenses, but right now we expect to perform all those activities and generate those revenues without true additional expense items.
spk05: Okay. And that stuff, is that stuff considered good income for REIT purposes, or does that basically need to be in some sort of taxable subsidiary?
spk01: No, it is segregated in our TRS.
spk05: Okay. And what line item does that appear on the income statement?
spk01: We don't have any material right now. It would be under other revenue.
spk05: Okay.
spk06: And then I guess, Paul. Let me just add, that was set up in the, that formal, you know, sale of assets and getting off the ground of the Opportunity Zone Fund was only in the first couple weeks of March, so just a tiny impact there. Q1. Q2 will be the first time you start to see those numbers come through.
spk05: Okay. And then what type of crops and locations were the two acquisitions you made during the quarter?
spk06: The acquisitions were all in the Midwest. They tend to be primary row crops. Largely speaking, were adjacent to, loosely adjacent to um, the land that we already owned. Um, so, you know, nice good acquisitions and fit in our portfolio quite nicely. Um, hopefully there'll be more to come in future quarters.
spk05: Okay. And then last one for me, what is the series B callable?
spk06: Uh, this first call date on the series B is the very beginning of October of this calendar year. Um, Erica, our general counsel, who happens to be in the room with me, Rob, just to follow up on your question. So this is fully in the public domain. I can tell you the exact fee level. We get 85%, .85%, so just under 1%, .85% fee on the assets in the Opportunity Zone.
spk05: Okay. All right. And then I guess the question winds up being, so the Series B is callable at par in October, why pay more than par for it now?
spk06: Well, it's callable at par plus appreciated value. Okay. And so we don't think we're paying above par, above what par is going to be as of the new, there'll be another pricing roughly August 5th or so, when the USDA farmland values survey is released. And so we don't think we're above where it's going to be at that point in time by any means. But the other reason is to get, you know, getting rid of that 6% dividend that has been a drag on the company's earnings power is important to us. And it's all part of this general effort to overall de-lever the company. Just to take your question one step further than you actually ask. So the first call date is October, where a company is not under any pressure to actually do anything. We have three years after that date to either pay off with cash or convert that preferred into common equity. So we would love to manage our way out of that security, but we're not really under any pressure. It's really just the beginning of a three-year period where we can work on that starting October 1st.
spk05: Okay. Thanks, guys. Appreciate the time. Great. Thank you.
spk00: The next question is from Dave Rogers of Baird. Please go ahead.
spk04: Paul, Luca, good morning, and appreciate the comments and the messaging around growth. Paul, I guess I wanted to go to the rollover of your farms this year. You showed a 30% to 50% profitability potential jump in your row crops, which is obviously the first we've seen of that in a while. As you look at the rollover this summer, it confirmed you said a third of the portfolio rolls. And how do you view the lease roll-ups that you anticipate to see this summer, just given some of the strength that you're starting to see now?
spk06: Yeah, so we have around 59,000 acres rolling over this summer. That's a lot of acres. It's still roughly a third in a value context because some of that rollover is, for example, eastern Colorado where acres are less expensive. So think of it as a third. This is probably a slightly bigger than normal year, so maybe 40% of the portfolio value rolls over this summer. I don't want to give you specifics because I'm sure we have farmers and tenants listening to this call and we're negotiating with them on these things. But I think you will see rent increases that are probably, frankly, a low of 5% on most row crop farms, a lot of 10% increases in row crop farm rents, and there will be some that are greater than 10, 15% or more in some cases. This is the industry dynamic. is that land values and lease rates in a tough farm cycle more or less stay flat. We talked about that, and Dave, we appreciate you being with us ever since the IPO as an analyst. We've always said you're going to sort of stand more or less still with possibly a little downward pressure or a little moves up when the farm economy stinks. And when the farm economy gets strong, this is where grain prices do matter, not directly to land value but to rents, you will have the opportunity to make material jumps in your rents. The way to intellectually think about that or mathematically think about it, in the best row crop regions, you're trying to get 35 to 40 cents of every revenue dollar as a landlord. In the lesser quality regions, it's more like 25% of every revenue dollar. But when you do that chart I presented in my prepared remarks, you start talking about, you know, 100, 200, 300 dollar increases in revenue per acre. and recognize its corn and soybean rotation in the best land, so you've got to kind of take the midpoint of the improvement in the two crops, it's not unlikely to see $25, $30 increases on rents. That's frankly 10% of a $300-ish sort of rent, and I think you're going to see, as I said, more than 10% in some cases. I hope that helps give you a little more clarity. We're going to do the best we can, and Now that I've said these things, when I ask somebody for a 25% increase, they're going to say, you said on the conference call, 10 or 15 at the best. But we're going to push them, frankly, as hard as we can. Our tenants do need to make money and be profitable. But it's been a tough couple of years for us and our shareholders as well. And we intend to get our share of this increasing revenue now when we can.
spk04: I appreciate all that color, Paul. That is helpful. As you look at the mix of that third of the value that comes due, it's not necessarily sure that the specialty crops are experiencing the same benefit. And so I wanted to ask specifically on specialty and what the mix is this year in that third rolling over between kind of specialty and row crop and just as we think about the balance.
spk06: I think it is, and Luca, you may want to look if it's anything we can look at that will help us know this, but it is more weighted to row crop than specialty this year. But it's, you know, you're talking value versus acres, so I don't really have a crystal clear answer for you. But there's an awful lot of row crop in that. Turning just to specialty and what's going on there, we made a small comment, I believe, in the press release on this. You know, the specialty crop troubles that farmers and therefore us had last year related to, you know, a lot of variable income in the specialty side of our portfolio. We think we're at least as good as last year and, you know, cautiously optimistic that we're better off. But it's really early in the season, right? It's very hard at this juncture to, you know, we haven't had any big problem that makes us think that volumes will be way down in the tree nuts or the citrus or anything. But on the pricing side... you know, that's still a, you know, there's a long ways to go in terms of the actual production of the product, and then on the pricing side, there's still a long ways to go in terms of international supply-demand characteristics that will affect pricing of key specialty products in the U.S. So we're feeling, you know, okay about it, but you need to take the okay with a grain of salt because of just how early in the calendar we are. Hopefully when we update after the second quarter, we can get a little higher level of certainty in terms of where we think that specialty crop side of our portfolio will come out.
spk01: And Dave, by way of background, since given the prevalence of variable leases in specialty crops, the impact of lease rollovers on specialty crops is really not particularly high. So generally speaking, when we make comments about lease rollovers, they're really a little bit more skewed towards our row crop portfolio.
spk06: Yeah, that's a very good point. You can say you got a better lease in specialty crop, but since so much of that lease revenue is variable, you know, good negotiation isn't the end of the story. You got to grow the crop and get the right price for it.
spk04: All incredibly helpful, guys. Last one for me, just Paul, or maybe for Luca, this would be on the quarter. Any one-time items that hit the first quarter result typically X the legal cost, you'd probably be at a negative AFFO, so it was really encouraging to see the positive. I guess maybe just a little insight on the drivers, any lease termination income, or just some later specialty crop revenue recognition that might have aided in the quarter.
spk06: We don't think... It's hard to always a little bit answer that question because as we've talked many times in the past, the way GAAP works for us is it's not based on our industry, it's based on real estate more generally. But there's no really large items that come to mind. I believe though that there probably would have been a little shifting of fourth quarter crop share revenue into the first quarter that was a little out of the ordinary and helped us a bit. But not, I mean, that's not the key driver. The thing that made the most difference is that we're in a relatively low interest rate environment year over year. We've seen modest improvement in the sort of operating data of the company, revenue, cost, so on and so forth. And you're seeing that but for the elevated legal spend, because we've essentially run through our insurance at this point. you're seeing what we'd expect to see as the farm economy turns back up.
spk04: Great. All good news. Thanks, Paul. Thank you very much.
spk00: The next question is from Craig Cucera of B. Riley Securities. Please go ahead.
spk02: Hey, good morning, guys. In your 10-K, you put out your expectations around fixed rent and variable rent leases for the year. I think this year it was pretty flat with 2020 at about $11 million. But my question is, is with some of these commodities that you're so heavily invested in, basically doubling from kind of their averages last year, how should we try to encapsulate what the impact of variable rent might be later this year? Is it 35% to 40% of the upside? Or I guess just how should we think about that in a higher pricing environment?
spk06: Yeah, this is, Craig, in many ways a continuation of the question that David asked. So, most of our variable rents are in the specialty crop area. So, this really powerful price recovery in corn, soybeans, and wheat isn't a huge driver of our variable rent. Now, we do, particularly in the what we call the high plains region. You think of eastern Colorado, western Kansas, and Nebraska. We do have quite a bit of variable rent in that region, and we will see those variable rents certainly on irrigated farms improve for us substantially. On the dryland farms in that region, of which many of our acres are dryland, it's driven by, you know, the prices look really good, but you have to have rainfall to get a good crop. And Right now, we have started to see in our areas, in the areas we own farmland, the weather pattern change and improvements in rainfall, which should lead us to a good crop result. But again, it's mid-May. Ask me in mid-July, and I can give you a better view on whether the crop volumes will be strong. So there will be a modest bump in variable for us because of row crop, but most of the variable side of our revenue stream is in that specialty crop. Those commodities march to a completely different drummer than the row crops. It doesn't mean they're bad, it's just not the same things going on there as what's going on in the crop area.
spk02: Okay, thanks. I appreciate the color.
spk00: Again, if you have a question, please press star, then 1. The next question is from Buck Horn of Raymond James. Please go ahead.
spk03: Hey, thanks. Good morning. My question is just curious about the acquisition and disposition environment among private market participants. And obviously the good news about the pricing and commodities has probably not gone unnoticed. I'm wondering if you're seeing – More competition coming up for bidding on acres that do come available for sale? What's kind of what's in the pipeline? And, you know, are people starting to underwrite, you know, these higher levels of farmer profitability into their assumptions? Is it getting, you know, is that bidding kind of getting out of hand or not?
spk06: Well, the farmland markets, and for the purpose of these comments, think of it only as the row crop region, so set California aside for a minute as you look at our portfolio. They don't all move in tandem. So let me kind of break it apart. The very best quality land in the strongest corn and bean regions in the country, like Illinois, where we are so highly invested, those valuations have moved and moved swiftly over the last six months. I think they have a long way to go, frankly. If you look at the increased revenue per acre and profit per acre, and you put a cap rate on that increased value that will be available to landlords, I'm not sure those prices are done moving yet, but they have already moved you know, frankly, thousands of dollars an acre. And what you see happen in this marketplace is two different things when land values appreciate or land values, you know, stay the same for a long period of time. When they stay the same for a long period of time, you see volumes gradually fall off because what we all forget is that there's a tiny percentage of farmland that trades any given year. It's only a a couple percent, maybe five at the most, of farmlands rolling over every year. Some people think it's just right around 2%. If the owners of the farmland today believe the prices available in the market are not very good, volume decreases, except for that volume that comes from a death in the family or a divorce or true financial distress. Conversely, when you see prices start to get stronger, you see volumes increase. And we have started to see volumes increase in the core of the Midwest, like Illinois. So you've got price increase and volume increase, which suggests to you that owners of farmland, which I think you can assume are kind of the smart money in the space, are saying, hey, that's a really good price for my farm, and they're you know, gradually selling a slightly elevated number of farms compared to what was in the marketplace two years ago, for example. We think that's going to continue and we'll see prices continue to go up in the Midwest. In some of the other regions or in the lower quality parcels of land in the Midwest, these price gains haven't shown up yet. And so what you, you know, you have to have a point of view about how far it may go and how strong it will go. You have to also have the long-term view that I expressed in the prepared remarks about this is really about global food demand and land scarcity. And you're going to go out and make some investments, hopefully where you get near and medium-term appreciation right after you make those investments. But even if you don't, the five, seven, 10-year period appreciation will reward you handsomely for having made those investments. So this is what we're going to try to do. We're going to deploy capital. We're going to try to do it, in some cases, off balance sheet where we don't cause dilution to existing shareholders as much as possible. And we're going to do our best to catch the cycle right But we don't believe, and I've done this now for 25 years, it's not about the cycle. It's about that power of that long-term trend. And it really is a long-term trend different than the other real estate asset classes. You cannot invest in this business sort of waiting for the big farmland value drop. You know, we had people back in 2014, 15, when the farm economy started to go into a more negative stance, telling us, hey, hey, just wait. Farmland's going to collapse 30%. And we told people, and it's on our conference call transcripts, no, it's not. And, you know, in my lifetime, there's only been one big drop in farmland. It was the mid-1980s. And I was too young to take advantage of it, but that's the only one. The other downturns, led to flat farmland pricing until you came back out of the downturn, and then there's a step function increase in value. So the takeaway here is we'll try to get it right based on getting ahead of the curve when we can, but the real wave is that long-term appreciation story, and we want to ride that as long as we can.
spk03: Thank you. That's a really thoughtful and detailed answer. I'm also curious, as you're talking to your tenants and other participants in the market, if they're talking about labor shortages in the field or other issues around labor costs or whether it's about the shortage of trucking and whether it's hauling costs, are you hearing issues around, in terms of estimating that profitability, what the farmer's cost equation is doing at the moment, and how do you guys think about that?
spk06: Yeah, so turning, labor is just one element of cost, and I'm going to break this answer into, again, the two broad crop types, row crop and specialty crop, because it's a little bit different answer for both. So, farmers will see gradually increased cost structure as we see prices increase, you know, the seed company, the chemical company, the farm machinery dealership. Look, they've all done what we've done for the last five or six years, sort of hunker down and hold on. And they're going to take a relative piece of that increased profitability. The ratios that everybody gets will probably stay roughly the same. It's, you know, if anyone has an advantage, in that battle to get a slightly higher percentage of the additional revenue, we think the farm owner, us, the landlord, is in the most powerful position, because we have the scarcest resource. But I think we'll get our share of it, and so will the seed and chemical company, and so will John Deere, and so on and so forth. So the farmer's going to see costs go up, but his share of that, his profitability, is also going to be significantly enhanced. As far as labor specifically goes, in the specialty crop area, we have heard some sort of difficulty in getting picking crews for citrus. That's partly COVID related and moving substantial amounts of workers across the southern border in a legal way in the COVID era is difficult. So there's a little bit of constraint there. Every year there's slightly more mechanization in that picking process than there was before. We haven't heard, at least from any of our tenants, that they couldn't get the job done. We've just heard kind of expressions of frustration, but not real crisis. On the row crop side of things, luckily that is a very mechanized industry already. In rural America, in the Midwest, in the Plains, in the Southeast, in the Delta, finding labor, particularly young labor, is really hard. Those towns are shrinking. Every farmer I know who has four kids has at least two of them who come out of college and stay in an urban area and don't come home. Sometimes it's all four who don't come home. That's an anecdotal example of a real statistic. So this is a growing problem. Again, mechanization in that industry has been pretty rapid. You actually touched, Buck, on one of the ones where it hasn't occurred. You haul the same amount of grain in a semi-truck today that you did 20 years ago. The weight you're allowed to put in a truck hasn't really changed. And so that is a bit of an issue. That trucking today, though, is largely being done by a lot of retired farmers who have a trucking license. You go look at trucks during harvest and they're all guys, frankly, my age or older driving those trucks in most cases. They come in and they work really hard for a few months and then they're back to semi-retirement, so to speak. We're getting through that, but it'll be a bit of a growing problem, I'm sure.
spk03: That's very helpful. My last one, and just a real quick thought, is just looking at the weather patterns, I guess the western region of the U.S. is already seeing pretty dry and record drought conditions for early in the year. Is that an issue to watch for the specialty crops looking ahead, or how do you think about the start of the year with the water levels already pretty low on the west side of the country?
spk06: Well, again, you've got to break it into different areas. You've got to break it down to a certain granular level a little bit. So first, if it's irrigated ground versus non-irrigated ground, and especially crops are almost universally irrigated, the drought in a near-term sense doesn't matter. You've got irrigation. Where the drought matters is if you are setting into a long-term cycle, five or ten years, or a permanent cycle, depending on your view on things like global warming, of not having enough water, that has long-term implications. This is something we watch very closely. We try to be very careful about the quality and quantity of water we have on our properties, and in most cases in the specialty markets, we feel pretty good about it. The thing that scares me more is this long-term trend of declining water availability than the near-term drought issue. because that's where our values of our properties could be affected. That being said, turn this on its head just a minute. We're not going to quit producing citrus or almonds or pistachios in the United States. If you are in the upper half of water availability, so to speak, with your properties, you may actually be benefited in terms of farmland valuation by the drought. because it takes the very bottom of the barrel and takes them out, and they stop producing. So you'll see a commodity price and valuations on farmland that still produces those specialty crops get stronger. We think we've got our position in the right place, that that's kind of where we'll be, is on the upper end of the beneficiary of a drought, so to speak, not on the negative end. And setting those comments aside, our hope is nobody gets hurt. But we try to be in the higher quality and quantity of water when we can, therefore benefiting from water restrictions on other farms. Turning to the row crop side, yeah, the drought today that you're talking about, it's pretty strong in most of the high plains. It's particularly strong in North and South Dakota in terms of a low winter snowfall and low rainfall so far this spring. Those regions on a nationwide basis are not really huge producers. There's a lot of acres up there, a lot of good farmers, but it's a colder region with a shorter growing season and an absolute volume of corn and soybeans, for example. Just not a huge contributor. What really drives those key commodities are Illinois, Iowa, Indiana, eastern Nebraska, eastern Kansas, Missouri, so on and so forth. That region of the country is in pretty good shape, probably a little drier than normal, but nothing that's at crisis level yet. But the predictions are that we're going to have sort of an average crop in terms of yield per acre in most of the country. not a huge bumper crop, which is, you know, the bumper crop would probably take prices back down. So, frankly, you know, Goldilocks, not too hot, not too cold outcome and volume of grains is probably where you want to end up from the standpoint of continuing to move farmland values higher. We think that'll be the best result for us, and that seems to be what we're getting set up for.
spk03: Thank you so much. Great color. I appreciate that.
spk06: Good. Thank you.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Paul Pittman for closing remarks.
spk06: Great. Thank you. Thank you for everyone for joining our call. And more importantly, thank you for supporting our company. Uh, we will continue to try to move our business forward with growth and further profitability. I look forward to talking to you again, uh, at the end of the next quarter. Thank you.
spk00: The conference has now concluded. Thank you for attending today's presentation.
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