Janney/FPI: Buying AFCO in an all-stock transaction

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FULL REPORT

REITS

Robert Stevenson,

Farmland Partners Inc. (FPI) - BUY

Buying AFCO in an all-stock transaction

Flash Takeaways:

FPI has agreed to acquire American Farmland Company (AFCO, NEUTRAL, $8.00 Fair Value) in an all-stock transaction expected to close in late 4Q16 (or early 1Q17). Each AFCO shareholder will receive 0.7417 shares of FPI stock, valuing AFCO at $8.23 per share as of Friday’s close (in-line with our Fair Value estimate). Given the length of AFCO’s strategic review process, we do not expect a superior offer to emerge.

Analysts Notes:

  • Deal expected to be accretive to earnings. FPI management believes that on a pro-forma basis, the transaction would increase FPI’s 2016 revenue by ~$16M (from $26M to $42M) and that it will be ~10% accretive to FPI’s AFFO per share in 2017 (~20% accretive once synergies are fully realized). We believe much of the cost savings comes from eliminating AFCO’s G&A as AFCO’s external manager (Prudential) is being retained (at least for now).

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  • FPI will have a nearly $400M market cap. Already the largest and most diversified public farmland REIT, this transaction will push FPI towards $400M of market capitalization (~$850 million of enterprise value) and give the combined REIT greater liquidity. Importantly, FPI will keep AFCO's attractively priced debt in-place (FPI’s Net Debt to EV is expected to decrease from 44% to 40% post-transaction).

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  • FPI will own more than 133,000 acres nationwide. With FPI's primarily row crop farmland and AFCO's primarily specialty and permanent crop farms, the combined portfolio will be composed of 293 farms (133,000 acres) across 16 states, with 2,000 acres under development and be 78% row crop, 22% permanent/specialty crop by value. FPI’s pro forma market exposures would break down as: West Coast (31%), Corn Belt (29%), Southeast (21%), Delta (12%), and High Plains (8%).

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  • Cowan joining FPI as President. FPI’s existing management team will remain in-place, with AFCO’s Robert Cowan joining FPI as President, and AFCO board members D. Dixon Boardman and Thomas Gimbel joining FPI’s board (increasing the board size from 6 to 8).

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  • We are maintaining our Buy rating on FPI, as well as our $12.50 Fair Value estimate.