Business Overview and History
Farmland Partners Inc. (FPI) is an internally managed real estate investment trust (REIT) that owns and seeks to acquire high-quality farmland located in agricultural markets throughout North America. The company has built a diversified portfolio of over 134,700 acres of farmland across 15 states, including prominent agricultural regions like the Corn Belt, Delta and South, High Plains, Southeast, and West Coast.
Farmland Partners was incorporated in Maryland on September 27, 2013, and elected to be taxed as a REIT beginning with its short taxable year ended December 31, 2014. The company is the sole member of the sole general partner of Farmland Partners Operating Partnership, LP, which was formed on the same date in Delaware. All of FPI's assets are held by, and its operations are primarily conducted through, the Operating Partnership and its wholly owned subsidiaries.
The company's strategy has been to acquire and own high-quality farmland that can provide attractive risk-adjusted returns to investors through a combination of rental income and long-term appreciation in land values. In its early years as a public company, FPI focused on rapidly expanding its farmland portfolio through strategic acquisitions. This growth was funded through debt financings as well as equity issuances, including an initial public offering in 2014 and subsequent offerings. By the end of 2020, FPI had grown its portfolio to over 1 million acres of owned and managed farmland.
However, FPI faced some challenges in recent years. High inflation and substantially increased interest rates starting in 2022 put pressure on the company's profitability and balance sheet. Additionally, FPI encountered impairment charges related to certain properties in 2023. In response, the company implemented cost-cutting measures and began strategically divesting select assets to strengthen its financial position.
Over the past decade, Farmland Partners has grown its portfolio significantly through strategic acquisitions, expanding from its initial 30,000 acres to the current 134,700 acres. The company has focused on acquiring farms with diverse crop types, including row crops like corn, soybeans, and wheat, as well as specialty crops such as almonds, pistachios, citrus, and edible beans. This diversification helps mitigate risks and provides exposure to different demand drivers within the agricultural sector.
In addition to owning farmland, Farmland Partners also provides agricultural lending through its FPI Loan Program, offering financing to farmers for property acquisitions, working capital, infrastructure projects, and other farming-related needs. As of September 30, 2024, the company had $22.2 million in loans and financing receivables outstanding.
Financial Performance and Ratios
Farmland Partners has demonstrated stable financial performance in recent years, with revenue growing from $51.7 million in 2021 to $57.5 million in 2023. Net income has also been relatively consistent, ranging from $9.9 million in 2021 to $30.9 million in 2023.
For the most recent fiscal year (2023), FPI reported: - Revenue: $57.47 million - Net Income: $30.91 million - Operating Cash Flow (OCF): $12.89 million - Free Cash Flow (FCF): $12.89 million
In the most recent quarter (Q3 2024), the company reported: - Revenue: $13.32 million - Net Income: $1.84 million - OCF: -$4.28 million - FCF: -$4.28 million - Year-over-year revenue growth: 14.6%
The decrease in net income compared to Q3 2023 was largely due to the impact of asset dispositions that occurred in 2023. The company had a gain on disposition of $10.29 million in Q3 2023 compared to $1.98 million in Q3 2024. Additionally, cost of goods sold increased by $0.87 million due to higher volume of citrus sales on directly operated properties.
The company's balance sheet remains healthy, with a current ratio of 89.02 and a quick ratio of 81.53 as of September 30, 2024. Farmland Partners has maintained a conservative leverage profile, with a debt-to-equity ratio of 0.58 as of the same date.
In terms of profitability, Farmland Partners has reported a gross profit margin of 76.6% and an operating profit margin of 41.3% over the past three years. The company's return on assets and return on equity have averaged 2.9% and 5.4%, respectively, during this period.
Liquidity
Farmland Partners' liquidity position remains strong, as evidenced by its healthy current and quick ratios. The company's strategic asset sales have further bolstered its liquidity, providing additional cash for debt reduction and shareholder distributions. The recent sale of 46 farms for $289 million has allowed the company to pay down $189 million in debt, which is expected to result in significant annual interest savings. This improved liquidity position enhances Farmland Partners' financial flexibility and ability to pursue new investment opportunities.
As of September 30, 2024, FPI reported: - Cash: $8.09 million - Available credit line: $132.1 million - Debt/Equity ratio: 0.58x
Operational Highlights and Recent Developments
During the third quarter of 2024, Farmland Partners reported net income of $1.8 million, or $0.02 per share available to common stockholders, and Adjusted Funds from Operations (AFFO) of $1.4 million, or $0.03 per share. These results were higher than the same period in 2023. For the first nine months of 2024, FPI reported AFFO of $4.7 million or $0.10 per share, which was also higher than the same period in 2023.
Subsequent to the third quarter, the company announced the sale of 46 farms comprising 41,550 acres of farmland located in several Southern and Midwestern states for $289 million. Farmland Partners used approximately $189 million of the proceeds to pay down debt, which is expected to result in $10.9 million in annual interest savings.
In addition to the strategic asset sale, the company also announced plans to issue a special dividend in the range of $1.00 to $1.10 per share to shareholders, reflecting the significant gains realized from its recent property dispositions.
FPI provided updated guidance for the full year 2024, with a forecasted range of AFFO between $11.8 million to $14.8 million, or $0.24 to $0.30 per share. This represents an increase of $0.04 on both the high and low end of the range from the previous quarter. The company noted that no other transactions beyond the Q1 2024 acquisitions and the $308 million in property sales in October 2024 are included in the 2024 projections.
Business Segments
FPI operates in two main business segments:
1. Farmland Ownership and Leasing: This is the company's primary strategic focus, involving the acquisition, ownership, and management of high-quality farmland throughout North America. As of September 30, 2024, FPI owned farms with an aggregate of approximately 134,700 acres across 15 states. The company generates the majority of its revenue from rental income by leasing this farmland to tenants who conduct farming operations. Leases are generally one to three years in duration, with some extending up to 40 years (e.g., renewable energy leases).
2. FPI Loan Program: This segment offers agricultural lending services to third-party farmers, both tenants and non-tenants. The program provides financing for property acquisitions, working capital requirements, operational farming activities, farming infrastructure projects, and other agricultural real estate-related projects. As of September 30, 2024, FPI had $5.10 million in outstanding principal under the FPI Loan Program.
Geographic Distribution
As of September 30, 2024, FPI's portfolio was distributed across several key agricultural regions: - Corn Belt (Illinois, Indiana, Iowa, Missouri, eastern Nebraska and Ohio): 34.5% of total acres - Delta and South (Arkansas, Louisiana, Mississippi and Oklahoma): 19.6% - High Plains (Colorado, Kansas and Texas): 16.2% - Southeast (Florida, North Carolina and South Carolina): 21.4% - West Coast (California): 8.3%
Risks and Challenges
While Farmland Partners' diversified portfolio and conservative financial management have contributed to its stability, the company faces several risks and challenges inherent to the agricultural industry:
1. Commodity price volatility: Fluctuations in crop prices can impact the profitability of the company's tenants and, consequently, its rental income.
2. Weather and climate-related risks: Extreme weather events, such as droughts, floods, or freezes, can significantly affect crop yields and production, which could negatively impact Farmland Partners' tenants.
3. Regulatory changes: Shifts in government policies, regulations, or subsidies related to agriculture can influence the financial performance of the company's tenants and the overall farmland market.
4. Competition for farmland acquisitions: Farmland Partners operates in a competitive environment, as both institutional and individual investors are attracted to the long-term appreciation potential of high-quality farmland.
5. Tenant concentration risk: The company's top tenants account for a significant portion of its rental income, and the loss of a major tenant could have a material impact on its financial results.
Legal and Management Developments
FPI was previously involved in litigation with a short seller, Sabrepoint Capital Management, regarding a 2018 "short and distort" scheme. In 2023, the Texas Court of Appeals granted the company's appeal, determining that the claims against Sabrepoint are not barred. The case has been remanded back to the trial court for further proceedings.
In November 2023, the company's former Chief Financial Officer and Treasurer departed, and the company incurred a one-time severance expense of $1.4 million in Q2 2024 as part of a cost-cutting initiative.
Outlook and Conclusion
Farmland Partners' diversified portfolio, conservative financial management, and strategic asset sales position the company well for long-term growth and value creation. The company's focus on acquiring high-quality farmland in key agricultural regions, coupled with its agricultural lending business, provides a unique platform to capitalize on the fundamental demand drivers in the farmland market.
The company's updated guidance for 2024, with increased AFFO projections and plans for a special dividend, reflects management's confidence in FPI's financial performance and ability to deliver value to shareholders. The recent strategic asset sales and debt reduction are expected to strengthen the company's balance sheet and improve its financial flexibility.
Despite the inherent risks of the agricultural industry, Farmland Partners' track record of stable financial performance and its commitment to prudent capital allocation suggest the company is well-equipped to navigate the challenges ahead and continue delivering value to its shareholders over the long term.