FPI - Farmland Partners Q4 Earnings: Is The Stock Worth Buying The Dip?

Summary

• Farmland Partners recently reported Q4 results.
• FPI stock plunged over 14% in the wake of the earnings release.
• We conduct an autopsy of the quarter and earnings call and see if it is worth buying the dip.

Farmland Partners ( FPI ) recently reported Q4 results and issued guidance for 2023. Unfortunately for shareholders, the stock plunged over 14% in the wake of the earnings release. In this article, we conduct an autopsy of the quarter and earnings call and see if it is worth buying the dip.

Farmland Partners Q4 Takeaways

The Q4 results were actually quite solid, as they were largely in-line with consensus estimates. For example, Q4 AFFO per share was $0.18, down only by a penny from 2021 levels and revenue was actually up 8.9% year-over-year. In fact, 2022 revenue and AFFO were the highest in FPI's history as its asset management business growth, rental growth, and reduced litigation expenses all combined to drive strong performance. Moreover, the portfolio remains well-diversified with 165,200 acres of farmland owned directly by the REIT along with 30,900 acres under management.

In fact, looking under the hood, the results were even better than the headlines. Average rent hikes on expiring leases in 2022 were a whopping 16% on the fixed cash rents in the row crop category, illustrating just how good of an inflation hedge farmland can be. Furthermore, FPI strengthened its balance sheet considerably by reducing its debt burden by 14% and increasing its access to liquidity from $30.2 million as of the end of Q4 2021 to $176.7 million as of the end of Q4 2022.

Management also signaled its bullishness on the state of the industry, stating:

The strong farmer profitability and profitability of the whole sector has translated into strong pricing for farmland in general as an asset class which, of course, we have greatly benefited from.

It also stated :

We remain positive on the outlook for the farm economy, as global food demand continues to be very strong and values of premium farms in our Corn Belt, Mississippi Delta, and Southeast regions continue to increase to their highest levels in years. As we move into 2023, our overall business is solid.

Clearly, 2022 was a strong year for them and - while Q4 was not exceptional, it was certainly not a "bad" quarter that warranted today's sell-off. This brings us to the 2023 guidance...

2023 Guidance Takeaways

It is pretty obvious that guidance is what caused the crashing stock price given the CEO's statement on the earnings call:

So it's sort of a bad deal here that Luca gets to talk about last year, which was a pretty strong year, and I get to talk about next year, which will be quite a bit of a challenge.

The market clearly disliked that the midpoint of 2023 AFFO per share guidance came in at a meager $0.205 compared to the consensus estimate of $0.32, despite the revenue guidance midpoint of $61.65 million being right in-line with consensus estimates.

The main culprit? According to FPI's CEO:

Supply chain disruptions, weather events, and other factors resulted in volatility in certain crop yields and crop prices. Our bottom line will be negatively impacted by these headwinds.

He went on to discuss that rising interest rates on their debt will hurt their bottom line as well.

What makes this disappointing guidance even more shocking is the fact that litigation spend is expected to decline sharply from approximately $1.3 million in 2022 to an estimate of $250,000 in 2023.

Management's failure to properly hedge against rising interest rates in an industry that already has notoriously slim spreads between debt and cap rates appears to be a big failure on their part. Frankly, in our view, this loss of trust in management to effectively manage the balance sheet is the most valid reason for today's stock price crash. Yes, they paid off a lot of debt in 2022 and increased access to liquidity. However, they failed to properly hedge against rising interest rates, which is costing them dearly today.

FPI Stock Valuation Analysis

Moving forward, is FPI still worth buying despite management's negligence to protect against rising interest rates?

Well, on the one hand, the cash flow trajectory of the business does not look good given the volatility of the specialty crop business and the rapidly rising interest expense. Based on these factors, if you value FPI based on its ability to generate cash flows consistently and support a rising dividend and/or buybacks over time, FPI does not look particularly attractive at the moment.

The CEO seemed to recognize that on the earnings call, stating:

So I'm personally very frustrated that all of the very strong things happening in the farm economy and therefore, in our portfolio, on the row crop side, are being taken away by the volatility, the negative volatility at this point in time on the specialty crop side.

That said, if you value FPI based on private market value of its underlying real estate, the stock looks like a screaming strong buy. This is particularly true when taking into account the defensive nature of farmland and the global food supply chain disruptions and shortages being caused by the war in Ukraine.

In fact, based on analyst consensus estimates, FPI currently trades at just 68% of its net asset value. Management highlighted this at length on the earnings call, stating things like:

[our] stock price fundamentally vastly undervalues the portfolio.

We own some of the best farmland in the world and we are trading at a very large discount.

The best value in Farmland today, in my opinion is...frankly, our stock. We can buy high-quality farmland through our stock better than we can do by buying farms. So it's something we need to really kind of focus on as a company.

The CEO went on to strongly imply over and over on the earnings call that they are looking at selling off a major percentage of their interest in specialty farms and redeploying the proceeds to pay down more debt in order to offset some of the headwinds from rising interest rates while also buying back their stock while it is so undervalued. This makes a lot of sense to us given that this is the weaker performing part of their portfolio even as its private market valuation remains quite attractive.

He said things like:

we've got to do something to stop having the relatively smaller piece of our assets - 20%, 25% of our assets are in these specialty crops - sort of being the tail that's wagging the dog.

[We are seriously evaluating] whether we should continue to be involved in the specialty crop business.

So no one should take from our comments that we are going to exit specialty crop, but we're certainly considering it.

The specialty crop side, because of the nature of the way those leases are, and we get these big swings. And I think it's frankly hurting us, and it's hurting the price of our stock. So we've got to figure out how to have that stop happening, might be joint ventures, might be dispositions, might be some other way of structuring our leases. There's a lot of choices. But we've got to get that problem to frankly go away.

if it is a farm that's kind of been underperforming or it's a farm that we're not in love with, we're actually looking at many, many asset sales. Don't want to sort of overpredict a certain amount, which is why you see the guidance where it is. But I think we're pretty dedicated to trimming parts of the portfolio that where we can get a profit and redeploy that capital into debt reduction or frankly into stock buybacks given what's happened this morning.

Meanwhile, the potential for the business to grow AFFO per share via the relatively new and still small asset management business could serve as a major catalyst for the share price in the coming years by attracting investors who are looking for cash flow and dividend growth instead of simply a NAV story. If management can truly execute on asset sales at the prices that it thinks it can and recycles that capital into bringing down interest expenses while also buying back a meaningful amount of stock at a discounted level, FPI could deliver exceptional returns in the next few years. This will be even more the case if interest rates stabilize and the asset management business grows like management hopes it will.

Investor Takeaway

FPI's management clearly failed stockholders by leaving the balance sheet so exposed to rising interest rates. That said, the stock clearly looks very undervalued and management believes that it can help address this problem by selling off farms at attractive values and recycling the capital into debt reduction and share repurchases. If it can do this and continue to grow its asset management business over the long run, FPI will deliver exceptional returns.

Even if its asset sales and asset management business growth are somewhat muted due to the high interest rate environment, we do not see much long-term downside for FPI from current levels given its steep discount to the value of its underlying real estate and the long-term bullish trends for the value of quality U.S. farmland. As a result, we believe FPI offers long-term patient investors an asymmetrically positive risk-reward profile and we therefore rate it a Strong Buy as one of the most attractive buys in the REIT ( VNQ ) sector today.

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