Video Transcript

0:00

Michael Iseman: All right. Welcome, everybody, to today's webinar. I’m with Carter Malloy here, who is our CEO. My name's Michael Iseman. I'm the Director of Investor Relations here at AcreTrader. This is a summary of thousands of calls we've had with investors. The nine or ten themes and questions that come up most often on these calls are kind of summarized here about investing in farmland and working with AcreTrader in general. And this is the first time that we are together in a room for one of the webinars in the past year.

Carter Malloy: One of the first times in a year we've sat together without masks. Michael and I are both vaccinated is the reason we're doing it finally, and we're excited about returning to normal life here soon.

MI: Should we jump into it?

CM: All right. We will.

CM: Alright, great, just sort of a quick background on the two presenters here. You hear Carter Malloy speaking here. I’m the founder of AcreTrader and the CEO. I grew up in a farming family and have been around ag my whole life. I've invested in ag throughout my career and spent a dozen or so years of my career in equity investing in the public markets. In short, I was always looking for investments with asymmetric risk/return profiles.

After spending more and more time on farmland, it occurred to me that this area of investing was actually far more exciting and interesting than public markets. I’ve since spent all my time dedicated to ag investing and AcreTrader specifically.

Michael, sitting here with me, is our Director of Investor Relations. We've known each other for years, and he's headed up our education and communication efforts for almost two years now. He has spent his career in and around the entrepreneurial ecosystem in our area and is really critical to our AcreTrader strategy.

Most importantly, though, Michael and I are just two of almost 30 employees here at AcreTrader. We're all solely focused on farmland investing and transacting. Our employees here, all of us really are lucky to be flanked by a myriad of awesome partners here. Advisors, board members, vendors, institutional investors, venture capital investors, the latter of which just closed on a large Series A funding round for our business. So we're very excited about the future ahead of us.

2:12

CM: All right. So very quickly to get to the heart of the matter, First, we're going to talk a little bit about farmland. Why would you want to invest in farmland?

It's a hard asset has historically has appreciated in value and thrown off a favorable dividend compared to stocks, which are valued on future cash flows and not necessarily underlying company assets. Bonds, again, are based on the ability of companies to execute and the ability to pay future debt.

Real estate is similar to land, but with the assets depreciate. And cash, which is where a lot of people unfortunately have money parked these days. Returns for savings accounts today are low if anything, and inflation works against you. So what has this meant for the actual performance of farmland?

Many of you have seen this on our website. Not only is farmland structurally attractive, it has historically performed well and had low volatility. So on the Y axis, or on the left-hand side or on the up-and-down, is growth rate. The X axis left-to-right is volatility, or how much the price of that swings around each year.

So in a perfect world, you have something completely in the top left corner, and in the worst-case world, you have something in the bottom right corner.

Essentially what this chart tells you is that farmland has had an incredibly attractive return profile with low fluctuations in price over long periods of time.

However, you can't just invest in a farm to get those types of returns. You really need expertise in managing a farm, getting enough good farms to choose from. And once you do, if you can't afford a million-dollar farm, and even then maybe people can only afford to buy one or two—they're not diversifying, you end up having these very large, concentrated bets on farmland.

4:01

The idea of AcreTrader was pretty simple. The idea is really that it should just be easier to invest in farmland.

Investing through AcreTrader allows individuals to gain exposure to a great alternative asset class with low minimums, intense due diligence, competitive fee structures, and complete deal transparency, all of which are very important and we'll discuss later in the presentation today.

From the investor’s perspective, our value proposition is very simple. Each farm goes into a unique LLC. You own the LLC. The farm that's inside of the LLC is rented out to a farmer. And we take care of collecting the rents, taking care of all of the headache from end to end, making that a truly passive investment for you, the investor.

So why AcreTrader? We’re not the only way for you to gain exposure to farmland and it isn't a one-size-fits-all. However, we do offer distinct advantages alongside very competitive fee structures. Our primary mode of compensation is acting as a real estate broker. Those are involved in land transactions just like they are installing a building or a home.

Those are already involved in the industry anyway. So, that is our unique approach to being compensated and allows us to keep our fees at—or below, really—the industry lows. And what we're really excited, again, to bring forward is low fee structures for you, the investor.

5:29

CM: So, how do we do it? And this could be its own multi-day presentation in terms of how we look at farmland. But really for more detail on what to look for these are a dozen or so micro-variables out of roughly 100 or so we consider on every farm. We do a lot of this with software with extensive proprietary databases that we have developed.

But at the end of the day, this takes a lot of manual labor too. It takes boots on the ground, takes local expertise. And many of our team have spent parts of our career, actually out getting dirty on the farm. I had my three year old daughter on a combine this weekend, actually.

And we are financial analysts; we are technologists here at AcreTrader, but we're actual farmers, first and foremost. And we really can't stress how much experience matters. As you all know, within any asset class, experience is ultimately what, what determines the winners from the losers.

6:26

CM: So we also talk a lot about how we evaluate farms, and I just spent a little bit of time on the previous slide. But it's important for you to have questions to ask also.

For folks new and old to the industry, whether you're looking to invest on a platform or through a fund or outright buy a farm, there are some critical questions to ask, such as operator risk, water situation. You should hear us talking about water; you should hear anyone in the world of farmland talking about water all the time. It is a crucial component of underwriting and investing.

What is the neighborhood like? It's really important to understand the area that you're investing in as well. These are the themes—some of the themes—you'll hear us rip on quite a bit. These are things that you should always be pressing us on or anywhere else you're investing in farmland or considering.

CM: To dive in a little bit deeper (then I’m going to hand it over to Michael), there are two types of offerings you will find on our platform.

Row crops here on the left typically received most of their total returns from appreciation, so increases in the land value.They would receive some of the returns from cash as well from the farmer paying rent. They tend to have more stable cash returns over time.

Permanent crops, on the other hand, on the right hand side here, like apples and nuts, and other types of crops that grow on long standing trees and vines—they have typically received more of their returns from the cash output every year, and less so for appreciation. So the cash returns here fluctuate more with the market due to direct operating exposure.

You can find this chart and a full blog post on this, and then a deep dive on this in our Learning Center on our website.

We would urge you to spend some time in that Learning Center reading about the farmland and how we approach the asset. We really want our investors to be as educated as possible and provide all of the possible information we can to you. We also would urge you to call us anytime. Any questions you have, you can call, you can e-mail, text, chat on our website. We are here and we want to speak with you.

So I'm gonna hand it over to Michael now, I've talked a little bit about farmland and what we do, and Michael is going to walk through a little bit about how it actually works.

8:49

MI: Thank you, Carter. We'll spend the next few minutes on both how to use the platform and what to expect working with AcreTrader. We’ll go into a detailed description of our offering expectations and the investment process here, but it's important to note that this is a self-service platform. It's incredibly easy to use. And we're happy to assist in any way possible.

So first on offering expectations: Our new offering volume is typically weekly. We’ll have farms that are announced, there'll be a mix of those permanent and row crops that Carter just outlined. They’ll be announced from explore@acretrader.com, which is likely how many of you found out about this webinar recording.

You can add that to your contact list and we'll also have a preview farm up on our website in the days leading up to the farm being available so that you can review all the details.

The subscription windows vary for each farm. They’re typically measured in days, or even hours sometimes. And that's partly why we have that preview farm available beforehand; we want everyone to have the opportunity to review the offering in detail prior to making an investment decision.

Subscription is simply on a first come, first serve basis. So once the investment window opens up, there's an “Invest Now option on that site. And once we reach, you know, $3 million—if it's a $3 million offering, then the system does not allow for any new investments.

Minimum investment range is typically in the $15,000 to $40,000 range. That's informed primarily by the size of the offering; a larger total offering would typically have a larger minimum investment. There are also some cap table limitations, but we also want to have the minimums low enough that many investors are able to build a diversified portfolio across different offerings if that is what their intention is.

10:26

MI: Zooming into the AcreTrader investment process, there are a few different ownership options that you can have. It will default to an individual investment, but you're also able to invest as an entity, like an LLC, a corporation, a trust, a solo 401k, or a self-directed IRA.

You would have to do a one-time verification for that, and it's called KYC, or AML: it’s an Anti-Money Laundering verification that is one time for each profile. And you can get that all set up within your user dashboard.

Your funding options within the investment process: We would encourage everyone to link a bank account directly. That makes it much easier for funding an investment, and also makes it much easier for sending you distributions because we can deposit them directly to your AcreTrader wallet.

You importantly do not need to pre-fund your wallet to invest; you can transfer the funds during the investment process. The wallet is just primarily used for sending distributions back to investors.

But there are two other options for funding an investment. You can do a one-time ACH, where you would just be prompted for the routing and account number for the account you're transferring the funds from. And you can also select “Wire Transfer” and initiate a wire transfer on your end in the one or two days following the investment.

11:42

MI: For the AcreTrader investor accreditation verification: So the way that we liste these offerings, they’re under Regulation D of Rule 506C, which details that we must verify all investors are accredited. And there are several ways to be an Accredited investor. You only need to meet one of them versus all of them, and we're happy to discuss your situation and the lowest friction way to verify your account.

The two most common methods would be to demonstrate that you have a net worth of over one million dollars in assets, not including your primary residence, or income of over $200,000 for the last 2 years.

If you're investing in multiple offerings—you see here the net worth and income accreditation window—our system can recognize that we recently verified you as accredited. You can bypass that if you've recently been accredited. But if you continue to invest, we would have to re-verify your account. So just have those ready during the investment process. That's where you'll be prompted to upload those documents.

12:38

MI: Now we'll do a quick walkthrough of the actual investment process. This is just an example farm just strictly for the purposes of showing what the investment process is like.

Right now you can see the “Invest Now” button on the right side of the screen here. Prior to the offering window becoming available, that would say “Notify me.” And you can sign up for a text alert to have a text reminder sent to you whenever the offering opens up.

If you select that “Invest Now” button, you would first be prompted with your investment amount. And so this would be the number of shares that you would be investing. For row crop farms, share is equal to 1/10th of an acre. So you can see the minimum here for this example is 25 shares, or the equivalent of 2.5 acres. As long as you meet that minimum, you can get pretty close to your target allocation.

Our permanent crop offerings are unit farms. And so there, it would typically be a 25,000 or 40,000 increment that you would set your allocation.

After you select your allocation, you’re then prompted with ownership information. This is where you would select if you want to hold this as an individual, a trust, an entity, and it would pull all the information from that entity profile that you filled out in your user dashboard.

Whenever you select on both of those slides, the allocation, and how you're going to own the farm, will populate an investment agreement, and then you select the investment agreement, and it pops out in a DocuSign window. This is where you can review and sign the investment agreement for the shares of that LLC that you're purchasing.

And I want to call out that in the “Documents” section of the preview farm—so if there's a farm that's going to be listed in, or going to be open for investment in the next couple of days, that preview farm functionality would house all of the soil information, the maps, and the documents. So you can see a template of this and review it prior to beginning the investment process.

But after you sign that—this is mobile-friendly as well, if you're investing on your phone, you can sign these agreements mobilely—you're prompted with your payment information. I detailed earlier the different options for payment. If I had linked a bank account for this example, you would see Michael's Bank of America Checking Account.

If you select ACH would be prompted for the routing and account number. Wire would simply share the wire instructions on the linked bank account, and ACH: Once the investment is confirmed, that would trigger the transfer; the wire is on your end to actually push the funds to fund the investment.

15:04

And the last step here is the accreditation verification. So, I mentioned this previously, you would upload your file and the “Choose File” section here for net worth. It's typically easiest to verify with account statements. And you can redact those; you would just need to show account statements with your name dated in the last 90 days, and over one million in assets.

If you're going to verify with income, typically W-2s or tax returns are the simplest form.

Also, a professional letter: If you have a CPA, financial advisor, or attorney, they can actually verify on your behalf and upload that. Importantly, this is whichever is the lowest friction for you, though one of those would need to be completed prior to the investment being confirmed.

So you would upload that file, move on to the next step, review all of the information, and you have to select the “Confirm Investment” button at the bottom of the page, and that is actually what reserves the shares. And then you receive your investment ID.

If there are any questions with your verification, you would get an e-mail in the hours or days following the investment. Your shares would still be reserved at your, you know, you won't lose your place in line, but we would need you to furnish those documents in a reasonable time in order to continue holding the shares for you.

16:16

So finally, just a little bit about what to expect when investing. We just covered the investment process of purchasing the shares.

Soon after that, and actually at the point of the investment process, the farm is under contract, but we haven't actually purchased it yet. We're raising the funds from investors to execute that purchase contract, and so usually in the weeks or month after the investment is confirmed, a deed would be uploaded after closing, and you'd be notified that the investment window has closed.

Next would be distributions, you can anticipate annual distributions. Those would typically be delivered to your AcreTrader wallet. Those would be either annual or semi-annual, if not otherwise stated. It would be December 15th, is when you can anticipate those.

Your farm updates: This will be a biannual report of what is actually happening on your farm. You can expect a little summary of weather in the region, any improvements that we made on the farm.

For example, we may be raising an additional $40,000 for an offering to improve drainage on the farm. So you could see updates, both written and and photos of what's actually happening on your farm and some additional timely information. So if the sponsor of a permanent crop offering just put in a two million gallon pond, we may send a quick notification just to keep you updated with what is happening on your property.

17:35

Next year's taxes: This would be an investment in the LLC taxed as a partnership, so you would have an annual K-1 and that's simply just uploaded to your user dashboard where you can find it and download it.

Fortunately, farmland P&L is typically a pretty simple one to close out, and so these are very timely. There was one that was early March, otherwise all of the K-1s have been distributed in February. It's our goal to never be the reason you're waiting to file your taxes.

And finally, the exit strategy: Typically, you'll see an investment horizon, or an estimated ownership period of 5 to 10 years, or a range of a few years. And that's because we don't want to be locked in to May of year eight to sell the farm because we don't know exactly what the market conditions will be there.

Our investment committee here will be monitoring those local market conditions, being responsive to any local offer, and so whenever we can achieve the highest returns for you our investors.

At that point, the capital gains to be distributed to the investors, similar to the annual income, to your wallet. And that's the life cycle of a deal.

And so the final question here we often get after someone learns about AcreTrader or farmland investing is, “Am I ready to invest? Could you just check my account real quick?” Three things that you could do would be to set up your wallet, verify your identity. So setting up your wallet would be just linking a bank account.

Again, you do not need to transfer funds into your wallet in order to invest. You can, but you do not have to, you can initiate the exact amount you're investing during that investment process.

You can complete your account verification. If it's not completed, you'll see this “Fill out ID verification info” flag within your user dashboard.

And lastly, add us to your content, your address book. We do have pretty high deliverability for our e-mails, but every once in awhile we’ll hear that it was flagged in the promotions folder or something. If you have Gmail, you can add us, create a contact with explore@acretrader; you can do the same thing with Outlook.

You can also select the e-mail that we sent you yesterday announcing this webinar, and say, “Filter messages like these” and mark as “important” or “never send to spam,” anything like that. Just to make sure that you are kept aware of the offerings as they become available.

So we took about 20 minutes there to run through the high level of AcreTrader, of farmland investing, and then some of the specifics of what to expect as far as our offering cadence and the investment process and getting your account setup. We’ll now turn the camera back on and go into a few questions.

There's a questions panel in your GoToWebinar dashboard where you're able to ask us questions.

20:26

CM: This is Carter speaking here. Michael, thanks for walking everyone through that. The important overarching theme is that it's easy.

That was a lot of slides to show you in detail everything you can expect going through that process. But we and our software engineers have designed this so that you can invest in a matter of a few minutes on our website. So. So it is very intuitive and very straightforward. And, again, should you ever have any questions, we're here to answer them.

MI: And now pulling up our questions here, I know we had a lot of people join in and so Carter and I both recently got vaccinated, so this is the first time we're presenting in the same room here, which is the first time in the past year, I think? So pulling up your questions here. You want to kick us off?

CM: Sure. So there's one...sorry, we have a lot of questions today, so thank you for the engagement. What is your view on organic farming? Is it the future of farming?

We do believe it holds a very important place in the world of farming. For some context in the United States, less than 1% of farmland is certified as organic. So it is still a tiny, tiny market slice overall. It represents 15%, maybe even 20 of our portfolio.

So, so we do view it very favorably, but that's not to say that we are inclusive or exclusive only of one type or the other forming. What would our goal is is to find farms that are attractive investment candidates, and that are sustainable for the long term.

So, whether or not the actual produce coming off the farm is organic, or that farm is regenerative or not, sustainability is a core theme, and it's very important in how we underwrite a farm. We're not here to my nutrients, and scrape the next five dollars of rent out of that farmer in order to juice returns just slightly in one or two years. We really want to look at the holistic picture and the long term view in underwriting the farms.

22:28

MI: Yeah, I think that's a good point. And also, farms can be converted to organic over a three-year period, and we've had multiple offerings where it wasn't organic at the time of purchase, but it would be converted during the investment window there.

There were a couple of questions on 1031s, and that's not something that we're set up for currently. So for a 1031, the same name has to be on both. Like properties in the transaction, and here, technically, you're purchasing shares of an entity that would own the land, and so we're not set up for that through the direct investments on our platform here. And the distributions, that is typically in December, if not stated otherwise on the investment.

CM: There was one up here..sorry, they’re coming quickly here.

23:13

What percentage of farm assets have not performed as expected, have not been able to meet the distribution goals? That is a great question, and we love hard questions, so please don't be bashful.

We have acquired 46 farms to date. In December, we paid out 500 distributions. All 500 of those distributions were at or above target. I want to say they are all above target but I want to be cautious.

There was one farm, though we did not pay the distributions in 2020 for that we had hoped for. That farm was a permanent crop planting farm. It was early in the ramp up period. So the distribution was expected to be 0.9%. So it's a really nominal amount of cash, and the farmer and the sponsor there was ultimately deciding to hold on to some of the product that had come off those trees, and sell them into some more pricing strength this year.

So I'd say in terms of being off track, we don't view that as off track whatsoever. Though, again, I am focusing on that one instance when as a whole, we outperformed expectations on just about every front on the farms that were on our platform last year. So we are actively paying distributions. Those do, right now, those happen once a year, in December.

In the spirit of full transparency (as we always do), the administrative burden of paying distributions out monthly or quarterly, is rather intense. It adds cost to the process, and our goal is to keep fees really low for everyone involved here. And so, we don't push high frequency of distributions. Our systems can now handle that twice a year, and we may move to a biannual, or even quarterly convention.

Though, again, we are, we are slow to move towards that, because we want to make sure we are respectful of the cost of operation and not driving that up for the investors involved.

MI: And part of that is just that rent is not collected on a monthly basis like other forms of real estate. It's often only collected once per year, or twice per year, and so it doesn't necessarily make sense to space it out like that, as you might see for other forms of real estate.

25:27

MI: We have a “thank you for a great presentation,” a few questions on, do we both personally invest, or is there skin in the game from the managers here at AcreTrader? And how does it work within an IRA?

So my family regularly invests in the platform as well as Carter's, and many other managers here and principals who have invested within AcreTrader. And so, in many or most cases, there is alignment on the cap table. AcreTrader Inc. does not have a position on the cap table of each one of these LLCs so that everything is purposely business risk remote. But we are all very excited about farmland, not just AcreTrader.

CM: We put our money where our mouth is. We're all on farmland here.

26:13

I’ll finish that here on “how does it work within an IRA?” So we are able to work with self-directed IRA providers. I think we've worked with a dozen of them. If you set up an account with the self-directed IRA, they will typically be, your custodian will send the funds on your behalf, and that would be triggered in the day or days after the investment process.

But feel free to reach out to us if you're getting set up on an IRA. It's a pretty straightforward process. And we would just send the distributions and the K-1 to the custodian, rather than to the individual.

26:42

CM: So, a couple here. One is, “Who sits on the investment committee at AcreTrader?”

Today, that is comprised of three individuals: Ben Maddox, who a lot of you have heard on, or maybe have heard on farmland presentations here previously. He heads up our farm operations team, so the underwriting, due diligence management, geospatial analytics, data analytics, et cetera. So, he, Ben sits on that.

I sit on that. So, previously, I was a partner at a billion dollar investment fund. Garrott McClintock, our COO, sits on that as well. Garrott also previously managed a few hundred million dollars of farmland as a direct operator. So that is our current investment committee.

CM: We've got a question around volatility and a good metric to track farmland volatility. That is a good one, and we wish there was a better metric.

There are two ways to track farmland performance. Number one is the direct way. NCREIF. That is sort of the industry standard. It's a private equity benchmarking tool to track farmland investment reports. That has been live since 1990. They put out quarterly metrics. And so that's a good way to track overall farmland investment performance.

We are members of the index, we have begun contributing data to it, as well, and we're very, very excited to share that data in the coming year, externally, to show the performance of the farms on our website versus the industry standard.

The second way that a lot of people do, but we want to caution you on, is tracking the underlying commodities. So soybeans, corn as an example, they move around a lot. And I think if you look at the price of corn or soybeans in the last six months, they've gone up dramatically, like a 50% plus surge in the price of those commodities. That does not mean that we will see a 50% immediate increase in farmland.

There is some loose correlation between long term inflation of commodity prices and the rent on the farm. And so therefore, I think that is a decent leading indicator over long periods of time, again, for increases in the value of a farm—inflation is another way to say that, and a core metric. Though again, we would caution against tracking the day-to-day, month-to-month movements of commodities as an indicator of farmland.

29:05

MI: We are at 1:30 here, Central Time, and so we'll wrap up pretty quickly. There's a lot of questions we haven't been able to get to, and so myself or a member of the Investor Relations team will reach out to anybody who asked a question we weren't able to address. I'll take one more here. The recording will be available. We'll send that out to everybody who registered this afternoon.

“Please discuss the expected annual depreciation, cash flow, and appreciation.” So how do we model returns? There's an article on our site, “The Internal Rate of Return for Farmland,” that details this specifically. And each farm will have its own financial model or financial expectations. For the depreciation, land itself, you know, a core thesis here is that the land will continue to appreciate, and also the tax code specifically says it's not something you can differentiate.

So that is a material part of the investment, but any improvements like drainage tile, even fence rows, irrigation equipment, and trees for orchards, you can depreciate, and so our CPA would handle that, but that could be passed through on the K-1 as some sort of shield on some of the income.

On the cash flow, as I mentioned, each farm will have its own projection for that. The orchards are typically a little bit more variable just because the trees have a production schedule throughout their life.

For row crop firms, we’ll just take the current rent contract. If it's rented out today at $300 per acre, even if we think that will get up to $350 per acre over the next few years, we’ll just use the current rent to rent contract in order to be conservative and and use that for projecting the anticipated distribution for the yield each year.

The appreciation, we use the 50 year average for farmland values appreciating in order to project that as well. So we don't have a mark to market speculation. It's just meant to, to model that farmland has continued to be a very consistent appreciating asset class. And so we do that, and we hope that we can outperform that in many cases, as well.

31:08

CM: Great. Thank you all so much for joining us today. Again, we have a lot of questions we were unable to get to in a short amount of time today, so we will try to respond to you today. And certainly anytime, please feel free to reach out to us via e-mail, text, website chat, or a phone call. We're happy to discuss farmland investing; it’s what all of us do all day every day, and we love it.

MI: All right. Thanks for coming out. Thank you.

Michael
Michael Iseman

Director of Investor Relations

Michael leads AcreTrader's Investor Relations initiatives, focused primarily on educating investors on farmland as an asset class, and what to expect working with AcreTrader. Previously, he served as a consultant supporting entrepreneurs at Startup Junkie Consulting. He holds a degree in Finance from the University of Arkansas.