Asset Sales Will Reduce Debt, But Environmental Challenges May Impact Future Performance

Key Takeaways

• Asset sales and deleveraging are enhancing net margins by reducing debt and interest expenses.
  
• Stock buybacks and strategic cost reduction are boosting earnings per share and improving net margins.
  
• Regulatory challenges and asset sale reliance threaten Farmland's future revenue stability, profitability, and net margin sustainability amidst fluctuating commodity prices and policy risks.

Catalysts

An internally managed real estate company that owns and seeks to acquire high-quality North American farmland and makes loans to farmers secured by farm real estate.

• The company anticipates increased rental income from its farmland, driven by robust performance in rent renewals and variable rents, particularly from specialty crop farms. This is expected to boost its revenue and AFFO.
  
• Farmland Partners has undertaken significant asset sales, which not only provided gains distributed as special dividends but also reduced their debt load, lowering interest expenses. This deleveraging is expected to positively impact net margins and earnings.
  
• The company has been actively purchasing back its stock, which is expected to support its earnings per share as the outstanding share count decreases, potentially increasing the value to shareholders.
  
• With strong cash flow from asset sales, Farmland Partners aims to expand the FPI Loan program, offering higher interest and fee income that would enhance revenue and potentially improve net margins.
  
• The strategic focus on reducing operational costs, such as lower property taxes and G&A expenses, is expected to further enhance AFFO and net margins.

Farmland Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Farmland Partners's revenue will decrease by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 96.7% today to 16.4% in 3 years time.
• Analysts expect earnings to reach $6.7 million (and earnings per share of $0.13) by about May 2028, down from $56.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 92.8x on those 2028 earnings, up from 8.1x today. This future PE is greater than the current PE for the US Specialized REITs industry at 27.7x.
• Analysts expect the number of shares outstanding to decline by 4.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Farmland Partners Future Earnings Per Share Growth

Risks

• The company faces regulatory and environmental challenges in California, particularly water scarcity and labor issues, which could negatively affect land values and income from those operations, impacting future revenue and profitability.
  
• Asset sales contributed significantly to recent gains, but the reliance on such sales for returns suggests potential instability in maintaining future earnings and net income growth.
  
• The company's significant reduction of interest expenses due to asset sales might not be sustainable if new assets are not acquired at favorable terms, potentially impacting net margins and earnings.
  
• The unpredictability of farm income due to fluctuating commodity prices can affect rent renewal rates, impacting stable revenue generation.
  
• The company's exposure to risks and uncertainties in government agricultural policies and funding could alter tenant performance, influencing future revenue and cash flow stability.

Valuation

• The analysts have a consensus price target of $12.75 for Farmland Partners based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $40.9 million, earnings will come to $6.7 million, and it would be trading on a PE ratio of 92.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of $10.06, the analyst price target of $12.75 is 21.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.