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Executives

Harold Edwards - President and CEO

Joe Rumley – CFO

John Mills - ICR

Analysts

Jonathan Feeney - Janney Capital Markets

Tony Brenner - Roth Capital Partners

Steven Martin - Slater Capital Management

Brent Rystrom - Feltl & Co

Limoneira (LMNR) F2Q13 Earnings Call June 10, 2013 4:30 PM ET

Operator

Good day, and welcome to the Limoneira second quarter fiscal 2013 conference call. Just a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Mills of ICR. Please go ahead.

John Mills

Thank you. Good afternoon everyone and welcome to Limoneira second quarter fiscal year 2013 conference call. On the call today are Harold Edwards, President and Chief Executive Officer, and Joe Rumley, Chief Financial Officer. By now everyone should have accessed to second quarter fiscal 2013 earnings release which went out today at approximately 4 PM Eastern Time. If you have not had a chance to review the release it’s available on the investor relations portion of our website at Limoneira.com. This call is being webcast and the replay will be available on the Limoneira’s website as well at Limoneira.com.

Before we begin, we would like to remind everyone that prepared remarks contain forward looking statements and management may make additional forward looking statements in response to your questions. Such statements involve a number of known and unknown risk and uncertainties many of which are outside the company’s control that could cause its future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward looking statements. Important factors that could cause or contribute to such differences include risks detailed in the company’s 10-Qs and 10-Ks filed with SEC and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events or otherwise.

Also in the company’s earnings release and in today’s prepared remarks, we include EBITDA which is a non-GAAP financial measure. A reconciliation of EBITDA to the most directly comparable GAAP financial measures is included in the company’s press release, which has been posted on our website. And with that, it is my pleasure to turn the call over to company’s president and CEO Mr. Harold Edwards. Please go ahead Harold.

Harold Edwards

Thank you, John. Good afternoon everyone and thank you for joining us today. On today’s call I will begin with a brief overview of some financial highlights in the second quarter and provide an update about our business progress in some of our growth opportunities. Joe will review the financial results for the quarter in more detail and I'll then review our fiscal year 2013 guidance and open the call for your questions.

Our second-quarter results reflect the solid progress we're making with our business as we generated strong sales, EBITDA and net income growth. Total revenue increased 45% to $23.3 million. This growth was driven by our agribusiness sales which increased 47% compared to Q2 last year. Our lemon operations continued to post strong growth in the quarter underscoring our success with our direct lemon sales and marketing strategy despite weaker industry pricing caused by higher levels of imports.

Our avocado results also contributed to our agribusiness growth increasing to $2.7 million compared to 601,000 in the prior year period. This year’s harvest for avocado has been very favorable, and we anticipate strong year-over-year avocado growth in the third quarter of fiscal 2013 as well. We also benefited from higher Navel and Valencia orange revenues due to the production associated with the Sheldon Ranch leases which began in fiscal year 2012. We expect that we will continue to benefit from higher orange sales during the current fiscal year now that Sheldon is fully integrated into our business.

Based on our sales to date and our outlook for the remainder of the year we are pleased to reiterate our guidance for lemon and avocado volume production. I will review this in more detail later in the call. In the second quarter we made significant improvements to our balance sheet. Joe will discuss our balance sheet in more detail but there are a few points that I would like to highlight. We reduced our long-term debt by $37 million primarily from the net proceeds from a public offering completed in February of this year. We also sold 165,000 shares of Calavo Growers stock and we entered into a purchase and sale agreement of non-core East Ridge property. These two asset sale transactions are in line with our long-term strategy to opportunistically monetize our asset in order to improve our balance sheet and provide us with additional capital to invest into our business.

Looking ahead for our agribusiness, we’re excited about the long-term growth opportunities for this segment of our business which is underscored by our strong agribusiness operating results in the second quarter. Last fiscal year we expanded our agribusiness operations by acquiring 355 acres of agricultural property and entered into the Sheldon Ranch leases for another 1000 acres. In total, our agribusiness currently consists of approximately 5700 producing acres of lemon, avocados, oranges, specialty citrus and other crops. We are the largest vertically integrated supplier of lemons in the United States and one of the largest growers of avocados in the United States. Importantly, all of our properties are the sustainable source of water.

Long-term we see a healthy pipeline of potential strategic and accretive agribusiness acquisition. We are continually evaluating different opportunities to expand our existing portfolio. There are many landowners who may not have a succession plan for their farming businesses. Given our scale and extensive knowledge of the California citrus market we are in position to capitalize on these opportunities. In addition, our agribusiness will benefit from our continued success in adding more customers both domestically and internationally.

Our direct sales and marketing for our lemons is proving to be very successful. We've begun seeing traction with our Unleash the Power of Lemons campaign which we began rolling out at the end of 2012. We’ve been partnering with leading health, wellness and lifestyle experts in major cities throughout the world to help build lemon consumption by educating consumers on the many innovative the lab are example. We recently announced that this month New York City’s Greenhouse Eco-Cleaning and FreshDirect market joined forces Limoneira to promote the power of lemons. Known for its dedication to the highest standards of green cleaning, Greenhouse Eco-Cleaning will provide each of their customers with complementary Limoneira lemons along with an innovative natural cleaning recipe.

Their customers will be directed to stock up on versatile fresh Limoneira lemons from FreshDirect and FreshDirect customers will also receive 10% off Greenhouse Eco-Cleaning services in the bargain. This is just one example of many innovative promotions that we are working on to do our part of educating the public on different ways that using lemons can improve their health and well-being.

Turning now to our real estate development segment, we are beginning an exciting phase with this part of our company. Last month the Ventura Local Area Formation Commission or LAFCo unanimously approved the annexation of Santa Paula East Gateway Project also known as East Area 2 into the City of Santa Paula. The annexation is expected to be completed and recorded later this month. East Area 2 is comprised of 25 acres that upon completion of development will consist of 350,000 ft.² of new commercial property and will complement residential development of East Area 1. East Area 1 was annexed into Santa Paula in February of this year and the annexation of East Area 2 was the final requisite approval for our entire master planned community. In total, these plans consist of 550 acres for a master planned community of residential units, commercial and light industrial properties, comprising 1,500 residential units, 560,000 square feet of commercial space, and 150,000 square feet of light industrial space.

We initially conceived continue this project back in 2004 and our team has been working diligently ever since to obtain the approval to allow us to proceed with this development. We've already begun track mapping the project and we remain on track to break ground on the project in 2014. The project will benefit from the land highly desirable location which is just 40 miles from the Pacific Coast and 65 miles north from Los Angeles and easily accessible to several major highways. Our estimates suggest that the East Area 1 master planned community represents approximately 25% of Ventura County’s buildable residential lot for the next 10 years. Our vision is to live, walk, work community, and we are having discussions with homebuilders and working through the alternatives for developing the project at this very moment.

We are looking forward to the opportunity to leverage our deep understanding of our community based on our long operating history in Santa Paula. As these projects progress we are well-positioned to benefit from the anticipated additional cash flow associated with them. Over time we expect to invest this cash flow into expanding our agribusiness and selected rental operations as well as to increase our dividend to enhance shareholder value. This is a very exciting time for Limoneira. We are. We believe that we have the foundation in place for strong growth for years to come.

Before I turn the call over to Joe, I would like to highlight just a few of the aspects of our business that given our unique and diverse business model provide us with distinct growth and greatly improved cash flow opportunities. First, the important focus of our farm fresh to family table for traceability and quality provides us long-term growth opportunities within our diverse agricultural product offerings both domestically and internationally. We are able to leverage our status as a low cost producer and one of the largest direct marketers of lemons in the United States. We are able to capitalize on significant growth within the avocado industry.

Aside from the strong projected harvest of avocados this year we are well-positioned to capitalize on the growing consumer demand of avocado. We generate steady cash flow from rental properties. While this currently represents a relatively small percentage of our total revenue as we generate cash flow from our real estate development efforts we will look for opportunity to strategically expand this segment of our business. We are positioned to potentially generate significant cash flows from the sale of our extensive Southern California real estate holdings that are uniquely situated for residential and commercial real estate development. We expect to utilize proceeds from the sale of Southern California real estate to purchase a deep pipeline of lower cost per acre agricultural land with productivity and cash flow similar to our existing agricultural properties. We’re able to leverage our sustainability focused investment in solar energy, water management and environmental stewardship. And lastly there’s very high barriers to entry in the Southern California agribusiness industry due to a number of factors including high land prices and a rigorous regulatory environment. We believe our uniquely positioned holding and leading position in the fruit ad citrus industry provide us a significant competitive advantage.

In summary, we had a very good first six months in fiscal 2013. Our focus is to continue to expand our agribusiness as well as beginning to take the steps to unlock the tremendous value we have in our real estate development holding. Industry trends remained very encouraging, and we believe that we are well-positioned to deliver strong growth in the second half of this fiscal year and beyond.

And with that, I would like to turn the call over to Joe to discuss our second-quarter financial results.

Joe Rumley

Thank you, Harold. Good afternoon everyone. For the second quarter ended April 30, 2013 revenue was $23.3 million, compared to revenue of $16.1 million in the second quarter of the previous fiscal year. Agribusiness revenue increased 47% to $22.2 million, compared to $15 million in the second quarter last year. Rental operations revenue was $1.1 million in the second quarter of fiscal year 2013, compared to $1 million in the second quarter last year. Real estate development revenue was $41,000, compared to $44,000 in the second quarter last year.

Our second quarter 2013 agribusiness revenue includes $15.5 million in lemon sales, compared to $12.4 million of lemon sales during the same period of fiscal year 2012, reflecting a larger number of cartons of fresh lemons sold, partially offset by lower average price per carton. We also recognized higher sales of lemon by-products compared to the same period last year.

Avocado revenue increased to $2.7 million, compared to $601,000 during the same period of the previous fiscal year, reflecting increased volume, partially offset by lower average price per pound. We recognized $2.3 million of orange revenue in the second quarter of fiscal year 2013 compared to $788,000 of orange revenue in the same period of fiscal year 2012. The increase is primarily due to production from Sheldon Ranch leases which we entered into in fiscal year 2012. Specialty citrus and other crop revenues were $1.7 million in the second quarter of fiscal year 2013, compared to $1.3 million last year, fiscal year 2012.

Turning to costs and expenses, for the second quarter of fiscal year 2013 we incurred $20.9 million of costs and expenses compared to $15 million in the second quarter of last year. The year-over-year increase in operating expenses primarily reflects increased agribusiness costs associated with the higher fruit production and sales for this segment. Packing costs increased primarily attributable to a higher volume of fresh lemons packed and sold compared to the same period of fiscal year 2012. We packed 912,000 cartons in the second quarter of fiscal year 2013 compared to 688,000 cartons for the same period of last year, a 32% increase. Third-party grower costs increased in the second quarter of fiscal year 2013 compared to the same quarter of last year due to an increase in lemons procured from third party growers.

Operating income for the second quarter of fiscal year 2013 was $2.4 million, compared to $1.1 million in the second quarter of last year. The increase in operating income is mainly a reflection of the increase in agribusiness revenue.

EBITDA was $4.2 million in the second quarter of fiscal year 2013, compared to $1.5 million in the same period of fiscal year 2012. A reconciliation of EBITDA to the GAAP measure net income is provided in the earnings release. The increase in EBITDA includes a $1.3 million improvement in operating income, a $3.1 million gain associated with the sale of Calavo Growers common stock and a $1.8 million equity loss on the Company's investment in HM East Ridge, LLC. I will provide more color on the Calavo Growers and East Ridge transactions in a moment.

Interest expense was zero in the second-quarter of fiscal year 2013 due to repayments of long-term debt made with the proceeds from our February 2013 public offering of common stock. All interest incurred during the second quarter of fiscal year 2013 was capitalized on non-bearing orchards, real estate development projects and significant construction in progress. In the second quarter of fiscal year 2012, interest expense was $71,000. Non-cash fair value adjustments on interest rate swaps resulted in income of $221,000 in the second quarter of fiscal year 2013, compared to $196,000 in the same period of last year.

Net income applicable to common stock, after preferred dividends, for the second quarter of 2013 was $2.4 million, compared to net income applicable to common stock of $672,000 in the second quarter of last year. Earnings per diluted share for the second quarter of fiscal year 2013 were $0.19 on approximately 12.8 million weighted average diluted common shares outstanding, compared to $0.06 on approximately 11.2 million weighted average diluted common shares outstanding last year. The year-over-year increase in shares outstanding is due to the February 2013 offering of common stock.

Turning to our balance sheet, we improved the strength of our balance sheet in the second quarter of fiscal 2013. During February 2013 we completed the offering of 2,070,000 shares of common stock at a public offering price of $18.50 per share, the total gross proceeds of $38.3 million. In the second quarter of fiscal year ’13 we used the net proceeds of $35.9 million from this offering and reduced our long term debt. Also as of April 30, 2013, we had working capital of $2.4 million.

Consistent with our goals of strategically monetizing assets to increase our financial flexibility, to capitalize on future agribusiness acquisition opportunities and to invest in real estate development projects, we recognized two asset sale transactions in second-quarter of fiscal year 2013. May 11 2013 we sold 155,000 shares of Calavo Growers common stock, Calavo Growers who had a right of first refusal to purchase the shares, at a price of $29.02 per share, for net proceeds of $4.8 million. A $3.1 million gain was recognized on the sale. We continue to own 500,000 shares of Calavo Growers common stock, which were acquired pursuant to a stock purchase agreement in 2005 for $10 per share.

Also in April 2013, Limoneira and HM East Ridge, LLC entered into an agreement to sell the LLC's East Ridge property located in Santa Maria, California, for $6 million. The transaction is estimated to generate net proceeds of approximately $5.7 million after transaction costs. The sale is anticipated to close this month. We wrote down our investment in HM East Ridge, LLC and recognized a $1.8 million loss, which is included in equity in losses of investments.

Now I would like to turn the call back to Harold to discuss our fiscal year 2013 guidance.

Harold Edwards

Thanks Joe. As I mentioned during my earlier remarks, we are reiterating our previously stated guidance for fiscal year 2013. We expect that revenue and operating profit as well as EBITDA and net income will grow in 2013 primarily driven by our agribusiness segment related to increased lemon and avocado volume and improved operating results from the Sheldon Ranch lease.

For the fiscal year ended -- ending October 31, 2013 we expect to sell between 3 to 3.2 million cartons of lemons, representing approximately a 25% increase over 2012. In addition, we expect to sell between 17 million and 19 million pounds of avocados representing approximately a 50% increase compared to 2012. We believe that lemon and avocado prices will be less in 2013 compared to 2012 due to higher industry production.

In closing, we believe we are well-positioned to achieve strong growth in 2013 and look forward to reporting to you on our progress. And with that I’d now like to open up the call for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Jonathan Feeney with Janney Capital Markets.

Jonathan Feeney - Janney Capital Markets

Few questions, first, it looks like the Sheldon Ranch year-over-year impact, it was about 1.5 million more in oranges. Was that on plan and what does that track to from a full year standpoint from this – I guess what rate of full year growth, you said it was primarily Sheldon Ranch driving on extra orange volume, what kind of full year revenue does that look like to be on track for and is that in line with your expected return?

Harold Edwards

I think maybe to answer the second part of your question first, I would say it’s right on line with our expectation for this year. One of the aspects of that transaction that lease Jonathan was that last year in 2012 as per the terms of the lease arrangement the Sheldon family received all of the revenues more or less and the benefits from that property, while we incurred the farming costs, some of which were capitalized and pushed into the 2013 crop. So here we are in 2013 now receiving the full benefit of production of the lease. And last year we incurred approximately $700,000 expense related to the Sheldon properties with no offsetting revenue and this year we think the differential between our revenues and our expense should be somewhere on the magnitude of positive $700,000 of operating profit. So we think the swings should be somewhere around 1.2 to $1.4 million and so far through half of the year we are right on track and right on plan with that integration and transition.

Jonathan Feeney - Janney Capital Markets

You said you are in an active dialogue with home builders in East Area 1. What’s the specific goal in terms of the timings of these sort of discussions, you have been talking about the dialogue for a little bit here and timing on what, when come more substantive agreements on investments and partnership tend to materialize, if in conversations you’ve had in the past and I am just wondering are people making offers right now that you think might become more attractive in the future or are we just not at the point where people are making offers yet?

Harold Edwards

So I think what we’ve just – what we are experiencing right now which was almost predictable but difficult to be sure on the exact timing was we went from a period of being totally dead and sleep to then interested in potential development in the future to what I would call frothy just literally overnight. And it’s really just a function of the very, very limited supply of new housing starts that have taken place in desirable coastal California communities over the last five years. And so along those lines, when you ask what the “normal dialogue” is I am not really sure what normal is right now because the scarcity of supply is extremely pronounced right now and especially if you consider that the East Area 1 and East Area 2 development projects represent 25% of the new housing starts in all of Ventura County for the next 10 years.

Every single homebuilder or potential homebuilder that’s interested in developing in Ventura County in the next 10 years, they are knocking on our door and while we're not in position to announce anything at this point I think we would say that we are very, very pleased with the conversation we are having today. Values are -- in the conversations we’re having are at or around the values we had hoped and expected to achieve in the progress and we’re I think very optimistic at this point that a deal or deals will be announced in very short order.

Joe Rumley

The other thing to think about in terms of timing is kind of the nature and/or structure of the deal that actually comes about. So for example, different ways they could go might be that a home, somebody comes in and just the whole property, or somebody who wants to joint venture with us or somebody we work with construction contractors and developers where we’re more heavily involved in putting lots for them to put homes up. So any of those would involve different types of due diligence, different types of agreements, different types of considerations on the part, both us and the potential partner or somebody we work with. So kind of in the early stages and then all those things would have to take place before we have any kind of agreement – or any kind of an actual transaction to get into.

Jonathan Feeney - Janney Capital Markets

And just one more detail question, on the sale of the Calavo share, should we expect more in that department in the future, what are your long-term strategic intentions there?

Harold Edwards

Jonathan, as you know I sit on the Calavo board. We remain extremely bullish on the future of avocado consumption in the United States. We remain very, very bullish on Calavo’s positioning as the leading marketer, distributor, and seller of avocado from all over the world for that matter within the United States and their penetration and our customer touch is really second to none as it relates to the products that they are serving. So we remain very bullish on that investment. We saw the opportunity to divest a smaller piece of Calavo more opportunistically to offset some of the capital losses that we took on the opportunistic real estate disposition. So the desire to sell a little bit of Calavo which now represents 50% of our initial investment which we made in 2005 sort of leaves us with what I believe is a pretty good holding pattern and with Calavo’s recent announcement of its FreshRealm business and with the continued success of Garden Highway and Renaissance Food and with all the great things that are going on with avocados no doubt all of you are seeing the Subway promotions of avocados right now. We feel pretty good about the future of avocados and extremely bullish on Calavo’s future. So I think that’s a long-winded way of saying we are kind of in holding pattern now, look forward to doubling the investment over where we are today in the not-too-distant future.

Operator

Our next question comes from Tony Brenner with Roth Capital Partners.

Tony Brenner - Roth Capital Partners

Question regarding avocados, Harold, your guidance is for a 50% increase in volume in the second quarter, avocado volume was up more than five-fold. And in your comments you suggested the outlook in the third quarter was very positive as well. So I am wondering where the aberrations here is, is it five-fold increase or the 50% guidance being way too conservative?

Harold Edwards

No, I think maybe we got some semantics mixed up but really the 50% increase was more guidance on sort of our rough estimates on what operating profit might be in avocados. (multiple speakers) That was probably an error but maybe go back and reiterate guidance. So last year 2012 we produced, marketed and sold about 12 million cartons and this year we’re on track and still sort of trending and tracking towards the 17 million and 19 million pounds, Tony.

Tony Brenner - Roth Capital Partners

Well, that’s a 50% increase, which is 550% increase in the second quarter.

Harold Edwards

So that’s just timing of harvest. And when it actually all played out last year versus this year, when you have a really big crop like we do this year we don’t have the luxury of being able to just pick a time in which we go into the market. We needed to really start our harvest full blast in March and keep it going – just in order to get that much fruit off the trees and the time period that we have given the reality of the labor forces that we have to help us do that, we really just need to keep it pretty consistent throughout the harvest time period. So I think that explains the aberration in the timing.

Tony Brenner - Roth Capital Partners

So then the way that the numbers will be reported, does that imply that [guidance] in the third quarter will be lower than the year before?

Harold Edwards

I think the other thing that’s happening right now at least from an earnings perspective revenues and costs is that year-to-date anyways our pricing has been considerably over where we thought it would be year-to-date. We are cautiously optimistic that we will be able to continue the pricing trend and really grow this year way off the budget in a positive way. With that being said, I think that you'll see third-quarter harvest coming in volume wise about where we thought right Joe. And then it comes in the fourth quarter.

Joe Rumley

Well I think to Tony’s point mass will potentially work out. We are ahead in volume by more than 50% now than we have to be, that trend has to slow down, they end up at a 50% increase. Whether it’s in the third or fourth, the length of the season and how much happened in the first quarter versus this year and last year is all in the timing as Harold said, we still think that 50% for the year will hold. And like we said the math has to work that some other quarter essentially will have to offset and be less in terms of volume compared to last year.

Tony Brenner - Roth Capital Partners

Could you be – offset of the Calavo sale profit versus for East Ridge large quartile to about a positive $0.04 a share in the quarter --

Harold Edwards

Actually $0.07, it was 1.3 million of positive earnings.

Joe Rumley

After tax without doing the math it might be been the number of the point you are referring.

Tony Brenner - Roth Capital Partners

One other question, the book value on the Santa Maria properties including East Ridge have been $10.5 million, and my impression was that virtually all of your properties kind of market value significantly above book value. East Ridge was sold at a loss, what if anything does that imply regarding the remaining Santa Maria properties?

Harold Edwards

I think that was the one outlier that was inconsistent to the way you are looking at and the reason for that Tony is that, that property had been held in a joint venture waiting to actually breakdown and to be developed in partnership. And because of its status as just waiting to be developed as the other assets were being impaired this asset was not being impaired. So that’s basically a long way around saying, while all the other assets have been marked to market down to reflect value that we believe with now improving real estate values, would mean the disposition of the remaining Santa Maria assets would be at or below market.

Joe Rumley

The other thing just to think about – there are some couple of points, what Harold said, the East Ridge property was in equity investments geographically on the balance sheet where the other three properties are included in real estate development. Then as Harold’s touching on the East Ridge property included in the equity investment is in a joint venture, was in a joint venture to be developed. So the model there and our expectation still would have been if they held it long enough would produce positive cash flows, it’s just over a long enough period of time. So you don’t take any impairment on that. It’s just from our standpoint, the question was how long we have to sit with our property and we thought we had other uses of the cash. And that property is intended for a single family homes, we think the horizon was quite a bit longer up in the Santa Maria market than the other three properties which are apartments, we think the horizon is in better shape at development apartments, they are some kind of different assets and different considerations work through the analysis there.

Tony Brenner - Roth Capital Partners

Are there any imminent plans for those remaining three properties?

Harold Edwards

We’re very close to we believe structuring a relationship that would co-venture the development of apartments in the remaining three parcels. And the long-term vision at this point is to hang onto our position and enjoy the future cash flows of those apartments.

Tony Brenner - Roth Capital Partners

So if they were to happen, and you co-ventured with a homebuilder what would be the – as that agreement was entered, what would be the income statement effect on that?

Joe Rumley

Entering agreement there would be no income statement effect on the constellation. We would just contribute the property on this direction at our bases and homebuilder then would move forward to develop the projects – eventually when those projects were completed, and we have earnings through the equity investment and cash flow, that way when they are completed and occupied using the –

Tony Brenner - Roth Capital Partners

And these are all accounted to be rental properties.

Harold Edwards

Exactly and then that investment would be tucked under the rental side of our three-pronged approach.

Operator

Next will be Steven Martin with Slater Capital Management.

Steven Martin - Slater Capital Management

Can you talk – last year you bought and leased some other property up north to agricultural property and your intention as I understand it was to continue to try to expand your agricultural properties up north. Can you talk a little bit about that?

Harold Edwards

So that’s going very, very well. As you may have heard as we made our presentations and talked about one of the great opportunities we see in California citrus, many of these farms can be characterized as sort of generational family farms, some of which lack succession for their future. And as such some of these properties are owned by people who are sort of in a unique position and sort of later stage in their lives, where for state planning purposes and maybe just for sheer lack of succession they are in need or are in search of exit. As such we’re sort of scouring the San Joaquin Valley looking for opportunities for acquisitions in areas where we think might be ideally suited to expand our citrus production both for lemons and for oranges and really consistent with that have to be the right soil conditions, the right climactic conditions and most importantly I think the most water – the best water conditions that we can find on this property.

So last year we picked up 355 new acres and then signed up the Sheldon’s properties for leases. Part of the reasons that we structured the Sheldon properties as a lease was with sort of a future eye towards eventual integration and merger into the Limoneira Company and for structural reasons starting with the lease made the most sense for us to begin to capture some of the benefits -- for each other and having Limoneira takeover that farming, I think what you’re going to see is Joe and Alex and I are aggressively working through due diligence and targeted acquisitions that sort in total represent somewhere in the neighborhood of about $250 million of potential acquisitions up in the San Joaquin Valley. I think it’s safe to say that I would characterize the opportunities that we’re finding as significant and I think our ability to rapidly expand our operations throughout California using this model of integration merger and acquisition is very realistic. And we look forward to announcing new deals in short order.

Steven Martin - Slater Capital Management

You said you purchased another 350 or 500 acres above and beyond the Sheldon. Are those being planted or are those actually in operation?

Harold Edwards

It’s a little bit of everything Steve. Some of it is replant, some of it is high-quality existing acreage and some of it is crop rotation and we’re switching out property that might be farming something that we consider to be marginal in return for some new lemon, and maybe Joe can comment on the recent planting,.

Joe Rumley

Yeah and of the 355 acres we purchased last year, about 70 of it was operating productive orchards and the balance was orchards that needed to be replanted and I think at this stage all those are replanted and typical start to see some production off of that in the four, five, six year timeframe. And lot of these acquisitions that Harold referred to is they have quite a bit lead time and they will take some time to work through as the different interest both of us and sellers, extend for his family and for succession planning interest. So it takes a while to work, some of these things we have been working on some of them for a while. That’s how those are expected to be bought, another 25 acres so far this year for 375,000 and that’s in this current quarter and for six months we made that acquisition. It also was a type of property that needed to be replanted. So replanting and whether or not need to be replanted and the quality and condition of orchard also directly in relation to what are paying for the property, but of course we will pay less in order for it to work.

Steven Martin - Slater Capital Management

So lot of these – we are not going to see pickups in volume based on – as a result of this for a couple years?

Harold Edwards

I think we can do a better job Steve as we communicate with Jonathan, Tony and Brent and the analysts that cover us, doing a better job at giving basic guidance in terms of when we make an acquisition what is going to continue to be producing and then what is new planting or non-bearing and that will give us a better ability I think to answer your question if I can read into it which is, okay, you bought all this land, when do I get to start seeing the cash flow from it and I think we can do a better job giving more specific guidance towards that.

Steven Martin - Slater Capital Management

Change subjects for a second, you talked about the residential property at East Area 1, can you talk a little bit about the retail commercial, light industrial?

Harold Edwards

So the two obviously go hand-in-hand but while we are trying to play a free close to that, we are having some very exciting conversations with the leading retailers right now who have expressed interest in potentially relocating to East Area 1. I think the sequence of events goes something like this is that once you see an announcement or announcements on the residential side of the East Area 1 project you will see concurrently or just very shortly right afterwards announcements about either long-term leases or outright disposition of pieces of the property to leading retailers that would complement the master planned community.

Operator

And next question will come from Brent Rystrom with Feltl & Co.

Brent Rystrom - Feltl & Co

Couple of quick questions, how many apartments are you thinking on this general reup, the remaining three properties, how many units?

Harold Edwards

So that’s actually one of the issues right now is that we’re currently negotiating with the cash drought city of Santa Maria. I am trying to increase densities on the three projects. So the best case for us is there is about 550 apartments on the three properties but probably case is somewhere around 500 –

Joe Rumley

Between the high 400 to 500 is what they are currently entitled for but it could go as high as 550.

Harold Edwards

So far they seem to be willing to grant the density bonuses and increases because they are looking for additional revenue. So we’re optimistic that we may be able to get this as high as 550 unit.

Brent Rystrom - Feltl & Co

And then from [quick view] perspective, dealing specifically to something that you would be a inventory overall of these units which should be a majority holder, how do you think that will shake out?

Harold Edwards

I think just where we are in the cycle and just still the fundamental inherent risks that exist on these projects, I expect will contribute land and a homebuilder will come in and put up all the capital to build the apartments and I anticipate somewhere around 65:35, 60:40 split if an arrangement we will be the minority and then we will as Joe explained use the equity method to account for that. If you wanted to put together some pro formas I think the 550, maybe say 500 units might build out over the course of the next 36 months type of thing or longer….

Joe Rumley

We don’t want to be cannibalizing each other. So they will phase in when they start to hit the market.

Harold Edwards

And I think you can kind of just back of the napkin pro forma about an average rate of about $1200 a unit and extrapolate that over 12 months and start to get a sense for what kind of rent flows we might see and what kind of return on capital we can get on those investments.

Brent Rystrom - Feltl & Co

And will that be a fairly proportional or would there be a management fee that would come before your 35% to 40%?

Joe Rumley

Well that’s our percent of ownership would be 35, 40% whatever the percentage, so net of everything that’s the cash flows of JV, we would get that 35% to 40% net of management fees and any other costs associated with it.

Brent Rystrom - Feltl & Co

And then from a simplistic perspective I seem to recall over a few small commercial properties, a few of these parcels, are there still out there?

Harold Edwards

Yeah, they are still out there. Actually East Ridge has these, that disappears with the sale. So that becomes the big issue or the big question in negotiations with the city of Santa Maria is if we get the density increases then some of that commercial property will be gobbled up by additional apartment unit. And so we’ll wait to see how we do with the density negotiations and that will determine the fate of the remaining commercial property.

Brent Rystrom - Feltl & Co

And you had mentioned what I would call as available pipeline plus $250 million of – is that all kind of realm that you are talking about – you said 250 million pipeline.

Harold Edwards

Actually without sort of saying – I think it would be all anywhere in the United States where citrus is produced.

Brent Rystrom - Feltl & Co

Thinking about that, how do you translate that – also think about you anticipate that your capital available for land acquisitions, do you think of that as a $10 million year number, or 20 million, I know some of it would be opportunistic particularly if you were to merge with somebody – but from a cash deployment perspective how you think about that?

Joe Rumley

The way we start thinking about it is we are very interested in growing our agricultural business, it takes two to put a deal together. So we think that our ability to like the Sheldon lease to enter into leases who potentially pay cash, certainly for some of the smaller ones as we have done so far and/or some of the larger ones, stock and/or combinations. So it’s really hard to say until the actual deal presents itself when some of the conversations we’ve had any of the above and the combinations thereof it could be. So certainly issuing stock or raising capital we just want to be in a position to be flexible to access the capital to make the deal happen.

Harold Edwards

And for modeling purposes to try to go at your question Brent, I would say that I think in 2013 we are kind of on track to potentially deploy another 20 million into acquisition, and I think in 2014 I would say that would be 50 million. That’s just sort of speculating on potential deals that if they don't materialize then it would be nothing.

Brent Rystrom - Feltl & Co

And then from a simplistic perspective, just several days out and San Joaquin ultimately on the hand, with particularly low level improved land that you do a lot of work 5, 10,000, pretty good land but without really your type of crops on it and 12000 and the citrus seemed to be hitting that mid-20s, is that kind of what you are planning?

Harold Edwards

Well, what we are trying to do – we are trying to be like a disciplined private equity company if any exists, but essentially I try to fix the ordinary and find high-quality lemons that are for between 15 and 20,000 an acre and then high-quality orange producing acreage for somewhere between maybe 12 and $18,000 an acre and again almost more important thing being crop specific comes temperature specific and access to water specific.

Brent Rystrom - Feltl & Co

My final question, I don’t know if Alex is on or not, but any updates on (inaudible) as far as midstream.

Harold Edwards

He is not on the call but there continues to be good cooperation in the industry and I guess solidarity and vigilant in fighting the bug. The bug is still spreading and moving around and when it is detected and identified it’s addressed and spring takes place. As of today still our closest form of the disease remains continued East of Texas. So we are still in great shape as it relates to the disease of HLB making its way here but the Asian citrus psyllid is here and continues to proliferate and spread although the commercial growers are attacking with continued vigilance and good sort solidarity as an industry.

Operator

And that does conclude the question and answer session. I will now turn the conference back over to management for any additional or closing remarks.

Harold Edwards

Well, I just like to thank you for all your questions and interest in Limoneira and over the next several months we will be attending select investor events and we hope to see many of you there. Thank you again and we would like to wish you all a very good day.

Operator

Thank you. That does conclude today’s conference and we thank you for your participation.

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