Throughout human history, farmland has been one of the most popular investments. In many pre-industrial societies, it was essentially the only source of generational wealth. While today’s investor has infinitely more choices, farmland remains a compelling investment for many reasons: Land has a fundamental value, and there will always be demand for crops as long as humans get hungry every few hours. Commodity prices oscillate according to market whim and geopolitical happenings, but whether the economy is red hot or ice cold people need to eat, and as long as people are eating farmers will be growing their food. But for a long time, the only way to invest in farmland was to actually buy farmland. From there you could either work the land yourself – which is the absolute opposite of passive income – or lease it out to someone else. For most individual, middle-class investors looking for passive income, adding farmland to the portfolio has always been impracticable if not impossible. REITs solved that problem, and now you can invest in farmland for a bit under $10.
This is the first in a series of posts looking at agricultural REITs, i.e., REITs that own farmland. Today we are going to focus on Farmland Partners, Inc. (ticker: FPI). According to its website, as of March 13, 2019 FPI “owns or has under contract” over 162,000 acres of farmland across the country. That property is leased to more than 125 tenants who combine to grow more than 30 crops.
According to SeekingAlpha, FFO per share has ranged from $0.40 to $0.53/share over the past few years, up from $0.20/share in 2015 and a small loss in 2014. The broader trend isn’t bad, although of course the Dude would prefer to see uninterrupted never-ending FFO growth. Forward FFO is projected to be $0.40/share, in line with the last couple of years. At the current share price of $6.79, FPI trades for 16.975 times projected FFO, which seems like a reasonable valuation.
It sounds like 2019 was a bit of a rough year due to the trade war with China (one of the largest export markets for American agricultural products) and some unusually bad weather. These issues may be weighing on the share price, and that’s not entirely unreasonable. But it would seem that there is a bit of short-term-ism at work here. Political conflicts and weather events will come and go.* I can’t tell you what U.S.-China trade policy will look like 1, 5, or 10 years from now, but I can tell you that most things eventually blow over and people have been profitably growing crops for more than 5,000 years. If anything, the current geopolitical fracas and bad weather may provide a buying opportunity for investors with a sufficiently long holding period in mind.
Looking at the balance sheet, FPI appears pretty strong. They have at last report approximately $1.072 billion in real estate assets against liabilities totaling $525.7 million. That leaves them about $547 million above water. That’s plenty of equity they can tap to make new acquisitions, weather storms relating to the trade war, and so forth. Moreover, at the current share price, FPI’s market capitalization is only $214.79 million. If FPI’s net asset value (“NAV”) is anything close to $547 million, that’s a pretty absurd discount and it suggests the potential for serious upside movement in the share price.
FPI pays a dividend of $0.20 per share, paid out quarterly in increments of $0.05. At current prices, the shares yield 2.95%. Looking at the projected FFO of $0.40/share, which is in line with results in the recent past, the dividend appears safe and well covered. The dividend history is less than ideal: FPI paid out $0.51/share in 2016, $0.355/share in 2017, and has been at $0.20/share since, which is pretty much the opposite of the trendline you want to see. Still, the current dividend looks safe, and we can hope that the payouts to shareholders will only increase from here forward.
In summary, FPI hasn’t had a perfect 2019, but the shares look cheap, the dividend looks safe, and it’s a convenient and inexpensive way to add farmland to your diversified passive income stream. This looks like a decent investment.
*Obviously there is plenty of room to debate the extent to which climate change will impact agriculture, but it seems reasonable to presume that a changing climate will effect the way farmers do business. But it would stand to reason that if the climate gets worse for some crops in some places it will get better for other crops in other places. Climate change is quite likely to be a net-negative event for the world and the Dude is all for combating it right away, but it’s not at all clear that it will be a net-negative event for North American farmers. More to the point, if climate change does completely wipe out American agriculture, then the odds are pretty good that society itself has collapsed and we are all living in a completely fucked Mad-Max-style post-apocalyptic hellscape, in which case, honestly, does it really matter whether your investment choices were good or bad? Bottom line: By all means worry about climate change when you are voting, picking a vehicle, or directing your political donation dollars, but don’t sweat it so much when you are picking a farmland REIT.
DISCLOSURE: I own some FPI shares and will probably buy more in the relatively near future.