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Oct 115 min read

Farmland Partners to Sell $289 Million of Farmland to Farmland Reserve, Inc.


Summary:

  • Farmland Partners (NYSE:FPI) announced the sale of a farmland portfolio for $289 million, with plans to allocate the proceeds toward debt reduction, share buybacks, and strategic acquisitions.

  • Based on the estimated split of proceeds—40% to share repurchases, 50% to acquisitions, and 10% to general corporate related expenses—the analysis projects an 11.5% price upside to $11.96 per share.

  • The current share price represents a positively skewed risk-reward opportunity based on the various scenario analyses conducted. In light of this, we recommend a 'buy' for FPI.


Transaction Details


On October 2, 2024, Farmland Partners (NYSE:FPI) annouced that it is selling a portfolio of 46 farms, comprising of 41,554 acres of farmland for $289 million in a single transaction in a finalized all-cash deal with Farmland Reserve, Inc. [1]


The company intends to deploy the resulting capital to reduce debt by approximately $140 million, to buy back stock, to pursue acqusitions, and for other corporate purposes. [1] The transaction is expected to generate an approximate $50 million gain over net book value on historical cost basis. [1]


Outline of Analytical Framework


We assess the expected net proceeds to equityholders on a per-share basis using management's guidance on the intended use of capital from the transaction, applying a marginal cash flow framework. In our analysis, we identify three primary components of potential returns for equityholders.


First, the direct return of capital to investors via share buybacks. Second, potential future returns through strategic acquisitions. Third, the allocation of proceeds toward general administrative expenses, which we assume will not provide incremental benefits to equityholders and is treated as an operational cost.


We estimate the net effect of each component after accounting for proceeds used to deleverage the company's balance sheet. The potential per-share benefit is then added to our reference price to determine an efficient price point at which this catalyst would be reflected in the security's value.


Split Assumption


Before diving into the analysis, we recognize that accurately estimating the allocation between share repurchases, strategic acquisitions, and general corporate expenses is crucial. Given that share repurchases are assumed to be returned to shareholders immediately, their value implications differ significantly from strategic acquisitions, which carry higher risk and offer returns at a much later date. Additionally, we treat proceeds used for general corporate expenses as operational costs, which we believe provide no direct benefit to shareholders.


In our base case model, we assume 40% of net proceeds (post-debt reduction) will be allocated to share repurchases, 50% to strategic acquisitions, and 10% to general corporate expenses. This estimate is not precise and reflects a key source of risk in our analysis. During discussions with company management, they declined to disclose specifics regarding the potential allocation, citing limitations to the information provided in their press release.


As a result, we rely on scenario analysis, a common approach in such cases. At the conclusion of our analysis, we incorporate a data table that outlines potential target prices based on different percentage splits of net proceeds.


Leg 1: Share Repurchase


We can approach this estimation in a couple of different ways. The first and simplest method involves analyzing the proceeds allocated by management for share buybacks and dividing that amount by the current share price to estimate the approximate number of shares that will be repurchased. This approach is akin to the "treasury stock method" commonly used in financial models that deal with share counts.

Alternatively, one could simply view share repurchases as a form of cash being returned to investors, effectively distributing capital through the reduction of outstanding shares. This perspective treats the buyback as a direct return of value to shareholders, similar to a dividend, but in the form of shares instead of cash.

In either approach, the results are comparable. Assuming 40% of the net proceeds from the land sale, after debt reduction, is allocated to share repurchases, we estimate a direct impact of $1.24 per share. This would translate into a 12% increase in ownership for existing shareholders, as the reduction in outstanding shares effectively boosts each shareholder's proportionate stake in the company.


Leg 2 : Strategic acqusition

The value added from strategic acquisitions undoubtedly requires a significant level of estimation. Key questions include: What type of acquisition will the company pursue? What will the return on invested capital (ROIC) be? Despite this uncertainty, we can look to the company's historical track record to assess management's effectiveness in deploying capital. By analyzing past acquisitions and the returns generated, we can make informed estimates about the potential future benefits these newly invested proceeds could yield for shareholders.



Based on the historical ROIC data shown above, we model 10 different ROIC scenarios, with an 80% likelihood of achieving a positive ROIC, despite the company's history of consistently delivering positive returns. [2] This approach builds a margin of safety into our analysis. Additionally, we assume that the returns to equityholders will accrue annually, reflected in net income, which allows us to treat the potential benefits from these investments as an ordinary annuity.


The present value of these returns is then discounted using the company's weighted average cost of capital (WACC), which has been adjusted for the lower cost of debt (potentially resulting from deleveraging efforts) and the shifted equity-debt structure that arises from both the share buyback and the debt reduction using proceeds from the land sale. [2]

The post-sale WACC is presumably higher due to the increased equity weight and the inherently higher cost of equity. Utilizing this updated cost of capital, and assuming equal probability across the various scenarios, we estimate the per-share impact of the net proceeds allocated to strategic acquisitions to be approximately $0.42 per share.


Leg 3: Generation Corporate expense


As mentioned above, we assume in our base case that proceeds allocated for general corporate expenses will account for 10% of total net proceeds. Furthermore, we anticipate that this allocation will provide no direct benefit to shareholders; instead, we consider it a mere administrative expense necessary for ongoing operations.


Putting it all Together


Based on the reference price of $10.31 per share on the day prior to the announcement, we incorporate the per-share impacts from both the share repurchase and strategic acquisitions. This analysis leads us to a per-share estimate of $11.96. As of the date of our analysis, this indicates an 11.5% upside resulting from the announcement, given our underlying assumptions.

As previously mentioned, our allocation of 40/50/10 across the three components of return to shareholders is a significant assumption upon which our expected price estimate heavily relies. To illustrate the sensitivity of our analysis, if we assume that share repurchases increase to 50% of net proceeds and general corporate expenses rise to 15%, we observe an additional $0.15 per share added to our estimated target price. Consequently, we present varying price target estimates based on different percentage splits, as detailed below:


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