Farmland Partners: Approaching A Buy Point

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When we past covered Farmland Partners Inc. (NYSE:FPI), we focused connected nan conversion of nan preferred shares and suggested that nan upside was not excessively awesome astatine nan prevailing value point.

But nan stock is still trading astatine a very precocious aggregate and nan dividend moreover if increased, will beryllium alternatively tiny. But location is an opportunity present and that opportunity is if FPI shares commencement trading astatine a premium to NAV and FPI tin accretively rumor shares and bargain much farmland. We will person to spot if that happens but successful nan interim we are maintaining a neutral standing connected nan shares.

Source: Conversion

Of people that was anterior to nan monolithic ostentation surge of 2022 and 1 would person expected FPI banal to person done well. After all, who has not heard astir farmland being a hedge against inflation?

Apparently nan shareholders of FPI.

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The banal peaked successful nan mediate of 2022 and has really underperformed nan S&P 500 ETF (SPY). Now nan full nett diminution since our article, and nan underperformance, mostly happened successful nan past 24 hours arsenic nan little portion of nan screenshot shows. So what was location not to like?

Q4-2022

FPI's results were astir successful statement pinch expectations. Revenues were up almost 9% and adjusted EBITDA roseate astir nan same. The institution noted that rent renewals were exceptionally strong.

renewed astir 95% of statement harvest fixed workplace rent leases expiring successful 2022 astatine mean rent increases of astir 16%.

Source: FPI Q4-2022 Press Release

The 4th fourth besides showed a coagulated description successful Adjusted costs from operations (AFFO). That metric roseate 12.7% successful full but was down connected a per stock basis.

FPI Q4-2022 Press Release

We don't judge immoderate of that should person amazed immoderate of nan marketplace participants. FPI's preferred stock conversion-related dilution has been known for immoderate clip (see vertical climb successful floor plan below).

Data by YCharts

Additionally, FPI has sold a decent magnitude of shares utilizing its ATM program.

During nan twelvemonth ended December 31, 2022, nan Company sold 8.6 cardinal shares of communal banal astatine a weighted mean value of $14.13 for aggregate nett proceeds of $121.3 cardinal nether its “at-the-market” offering program.

Source: FPI Q4-2022 Press Release

These stock issuances person been portion of nan deleveraging workout and you tin spot nan reductions successful some indebtedness levels and Series A preferred shares outstanding.

The Company had full indebtedness outstanding of $439.5 cardinal astatine December 31, 2022, compared to full indebtedness outstanding of $513.4 cardinal astatine December 31, 2021, a simplification of $73.9 cardinal during nan twelvemonth ended December 31, 2022.

The institution had Series A preferred units of $110.2 cardinal outstanding aft nan redemption of $10.0 cardinal of Series A preferred units during nan twelvemonth ended December 31, 2022.

Source: FPI Q4-2022 Press Release

So location was really thing successful nan study that should person amazed anyone that followed nan story. Except nan guidance.

2023

The 2023 guidance tin beryllium accessed from nan supplementary package connected nan company's website. That guidance apt created immoderate jitters. We person highlighted what we deliberation are nan applicable portions below.

FPI Supplementary Package

The fixed workplace rent was a coagulated boost from nan 2022 levels. Offsetting that were nan adaptable payments and to immoderate grade moreover nan harvest sales. Total revenues are expected to beryllium up marginally (midpoint of range). With revenues flatlining, nan biggest detractor, liking costs, is what is driving nan AFFO drop. The 30% diminution successful AFFO apt did not resonate very good pinch nan remainder of nan publication from nan Q4-2022 property release. What besides comes to nan forefront is that these increases successful liking disbursal are happening moreover though full indebtedness has been meaningfully reduced.

Our Thoughts

While nan driblet successful AFFO sounds bad, you really should not beryllium investing successful farmland and by hold successful FPI, for nan rate flow. At 20 cents a twelvemonth aliases 30 cents a twelvemonth aliases moreover 40 cents, nan $10.50 banal value is not going to springiness you a reasonable rate flow. What you are investing for is nan nett plus worth aliases NAV, and imaginable appreciation complete nan agelong haul. That's it. Farmland is simply a unsocial diversifier and a very resilient 1 astatine that. It is besides 1 of nan poorest rate travel producers. This gets moreover worse erstwhile you return a institution buying aliases owning 3.0% and 3.5% headdress complaint properties and paying 5% and 6% liking rates connected nan leverage component. The mathematics is not successful your favor.

So if you judge that idea, past you person to find if nan existent value and NAV make sense. Consensus estimates are astir $15-$16 per stock and nan existent value offers a decent separator of safety. We will statement present that FPI has traded astatine large discounts to NAV for agelong periods and nan institution has besides issued shares astatine what it considers to beryllium a mini discount to NAV. Both these facts will mean that anyone hoping for a speedy move up will beryllium disappointed.

Finally, we will statement that location tin beryllium immoderate risks to NAV. Farmland prices person ever been promoted arsenic ne'er having a diminution twelvemonth complete year. That is mostly true. But we tin spot a level value situation for galore years if headdress rates expand. While group are looking astatine nan existent 3.0 and 3.5% headdress rates arsenic if they are written successful stone, we person so discoed (timeframe pun intended) pinch 8% headdress rates successful nan past.

Agricultural Economic Insights

Let america show you immoderate much mathematics present really nan waste and acquisition tin activity poorly for you. Take a 3% headdress complaint farmland spot and presume nett operating income expands astatine 5% clip each twelvemonth for 10 years and astatine nan extremity of that 10 twelvemonth play nan spot trades astatine a 5% headdress rate. Your onshore worth remains astir unchanged aft a decade.

Let america show you immoderate much math. Safehold's (SAFE) a communicative which has nan aforesaid asset-rich, cash-flow-poor, ring. The statement NAV for SAFE was $60.49 14 months back.

State of REITs-Simon Bowler-Seeking Alpha

Today it is astatine $28.87.

State of REITs-Simon Bowler-Seeking Alpha

Did you bargain astatine $75.00 reasoning you had a level astatine $60.00? NAV astatine a fixed clip constituent should not beryllium utilized successful isolation to make a bargain aliases waste decision. Knowing wherever that NAV is headed is acold much important.

Verdict

You person to person a large separator of information erstwhile you frolic successful debased headdress rate, ultra-long long assets. SAFE's investors apt recovered that retired successful 2022 and FPI investors sewage nan memo yesterday. That said, nan existent discount is looking modestly attractive. What is not looking charismatic is nan implied volatility connected nan stock. Generally we thin to found positions utilizing a protect attack and that requires aiming for nan onslaught we for illustration via options. The existent implied volatility is beautiful debased considering nan monolithic driblet that conscionable happened. We are looking to get progressive adjacent nan $8.50-$9.50 area and this is connected our watchlist.

Please statement that this is not financial advice. It whitethorn look for illustration it, sound for illustration it, but surprisingly, it is not. Investors are expected to do their ain owed diligence and consult pinch a master who knows their objectives and constraints.

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