Yesterday on this here REIT Blog I wrote about how you can use REITs to invest in farmland and looked at one specific agricultural property REIT–Farmland Partners, Inc. (FPI). Today, I am going to look at another agricultural REIT – Gladstone Land Corporation (ticker: LAND). Before we start looking at LAND, let’s review some of the reasons why you might want to invest in farmland:
- Increased diversification.
- Farmland has been a stable investment for thousands of years.
- You can finally make an account on FarmersOnly.com. (Note: This may or may not be true.)
- You are looking for an excuse to wear plaid shirts tucked into Wranglers.
Whether or not you have any interest in investing in farmland, the fact that it’s an option is a great illustration of why I love REITs. It used to be that if you wanted to own a diversified real estate portfolio you needed to have enough money to buy a bunch of different kinds of real estate which, suffice it to say, most of us do not have. The only way this option would be even remotely available to ordinary people would be to take on a ton of leverage – an option that is, to say the least, not without risks. Now, for about $10, you can invest in farmland thanks to REITs. Now, onto the REIT at hand, Gladstone Land Corporation:
Gladstone’s business model involves buying farmland and leasing it out, primarily on a “triple net” basis. (Note: A triple net lease is one which requires the tenant to pay for property taxes, insurance, and repairs. This is generally the most profitable, low-risk lease variety from the landlord’s view, which is why as REIT investors we always like to see triple net leases.) You can see a complete list of their farms here. Gladstone’s website provides a pretty awesome level of transparency. You can browse through their farms and actually see satellite pictures of each farm as well as information on acreage, water sources, and crops grown. Clicking through their California farms, I saw almonds, pistachios, peppers, figs, and strawberries. The wide assortment of crops across geographic regions offers protection against a dip in corn, soybean, or wheat prices. (Note: The Dude is not even going to begin to guess what will happen to commodity prices in the near future; the point is just to know that commodity prices change for whatever reason and diversification across different crops can help to buffer against that risk.) This is intentional: In a PowerPoint for investors, Gladstone expressed a belief that “farmland growing annual fresh produce (e.g., most fruits and vegetables) and certain permanent crops (e.g., blueberries and nuts) is a superior investment over land growing commodity crops (e.g., corn, wheat, and soy).
As of November 6, 2019, Gladstone owned approximately 86,534 acres of farmland across 10 states, with the biggest presence in Colorado, California, and Florida. (Source: November 6, 2019 investor presentation, p. 12.) This is the result of pretty quick growth: Gladstone’s portfolio consisted of less than 20,000 acres in 2015. (Ibid. at p. 17.) Gladstone reports the fair value of its portfolio, as of September 30, 2019, as $824.5M. (Ibid. at p. 22.)
Looking at the numbers, LAND had FFO per share of $0.49 last year, up from $0.38/share in 2018 but down from $0.53/share in 2016 and $0.54/share in 2017. Rental revenue, however, is steadily increasing at a nice rate: $11.9M in 2015, $17.3M in 2016, $25.1M in 2017, $29.3M in 2018, and $35.2M in 2019. They have almost tripled rental revenue in the past 5 years.
FFO for 2020 is projected at $0.53/share. Assuming that is correct, the current P/FFO ratio is about 26.4, which is a bit higher than I generally prefer. The dividend is $0.54/share and the shares yield 3.83%. That’s a decent yield, but I always get nervous seeing a dividend that is higher than projected FFO per share. If they can’t grow FFO, they may eventually need to either take on debt to pay the dividend or else cut it, neither of which are good outcomes for investors. Fortunately, the rocketship-like growth in rental revenue suggests to me that as long as they can keep costs under control the FFO growth will follow. The 3-year dividend growth rate of 2.58% does not amaze me, but, on the plus side, Gladstone has increased the dividend at least a little bit each never and never cut it.
Looking at the balance sheet, I see $503.7M in total liabilities. Subtracting that from the $824.5M in estimated total land value reported by Gladstone in its investor presentation, that gives us a surplus of about $320.8M. If that is correct, the shares seem slightly undervalued (notwithstanding the somewhat-lofty P/FFO ratio), as Gladstone’s current market capitalization is approximately $297.1M. This disparity suggests room for a 10% increase in share price even without a change to the company’s underlying fundamentals.
The Dude’s Final Recommendation: LAND looks like a great, fast-growing company. I may buy some shares, but I am a bit concerned about the closeness of their dividend and their FFO/share. Might be best to keep this one on a watch list and dollar-cost-average in slowly over the next year or two in order to keep an eye on FFO growth.