Farmland prices have been going ballistic over the past few years, asserts Jimmy Mengel, editor and chief investment strategist at the newly launched advisory service, The Profit Sector.
A series of economic forces — high prices for commodity crops like corn, soybeans, and wheat; a robust housing market; low-interest rates until recently; and an abundance of government subsidies — have to create a “perfect storm” for farmland values, according to Jason Henderson, a dean at the College of Agriculture at Purdue University. This has driven larger investors into a feeding frenzy as they snap up acre after acre at record prices.
Buying and maintaining your own farm as an investment is completely out of reach for most of us. That’s why 30% of all farmland in the U.S. is owned by landlords who don’t farm themselves.
So instead of leveraging your life savings on buying the land, heavy equipment, fertilizer, and labor that it takes to run a successful farm, it would be more prudent to the retail investor to, in essence, become a landlord yourself with one easy step.
With a farmland REIT (real estate investment trust), it’s as simple as buying stock to gain exposure and safety to the farmland market. Buying into a REIT is much like becoming a landlord — you collect checks for somebody using the land you’ve bought and cultivated.
Farmland REITs are rather simple. In one case, the company will acquire the land necessary for farming and lease it to the farmer in a long-term lease. They can also provide capital to farmers to expand their operations, increasing the property's value for both the company and the farmer.
These leases are typically a triple-net lease (NNN) structure; the tenant or lessee pays all the property's expenses, including real estate taxes, building insurance, and maintenance. The company itself collects the rent.
That rent typically rises yearly and contains an inflation-linked escalation clause, ensuring that the company will maintain a stable and consistent cash flow. And once the farm produces crops, you, as the shareholder, get a piece of their bounty — both in the form of stock appreciation and a mandatory dividend.
Gladstone Land (LAND) is the largest farmland REIT out there — they own 164 farms with 113,000 acres in 15 states worth $1.5 billion in total. LAND has also made monthly dividend payments consistently since its IPO in 2013. The company has increased those dividend payments 26 times over the past 29 quarters. That is to say, Gladstone Land is a solid farmland REIT.
However, I have a lesser-known company that I think has more potential for both long and short-term growth. Farmland Partners (FPI) owns nearly 200,000 acres of farmland that it leases to over 100 tenants that grow 26 different crops in 18 states. It collects rent from these projects and earns management fees for 25,000 acres for other farmers.
FPI also provides auction, brokerage, and third-party farm management services. The company also utilizes some farms for renewable energy like solar and wind projects, which also contributes to their revenue streams.
Over the last three years, Farmland Partners has provided a nearly 32% annualized return. That's over three times the S&P 500 during that same period and is around four times more than today's inflation rate.
That's a 110% total return, which doesn’t include the dividend, hovering near a 2% yield. The stock got a bit of a boost after releasing Q3 numbers that beat expectations:
• Operating income was up over 200%
• Increased net income by $3.8 million
• Increased Adjusted Funds From Operations (AFFO) by $5.7 million
• Decreased debt by $16.0 million while maintaining $48.0 million of undrawn capacity
• Renewed approximately 60% of leases expiring in 2022 at average rent increases in excess of 15%
FPI is a great way to diversify your dividend portfolio with a sector that is known for being resilient against inflation, market dips, and even recessions. Just this month, the world hit a record population of 8 billion. You’d be wise to gain exposure from this very underrated sector.