F

armland has quietly become an extremely popular investment vehicle for family offices and private funds over the last decade. Sixth Street, a $60B asset manager, became one of the largest owners of avocado farms in the United States. Bill Gates is now America's largest landowner through his family office which owns over 270,000 acres across the country.

Farmland differs from other assets because it is a crucial human resource and tends to appreciate in poor economic conditions. It also tends to provide returns that exceed inflation in all environments. Investing in farmland requires care and nuance. Almond trees, for example, have a 25-year asset life, but don’t produce any nuts for the first seven years after being planted. Staple crops like corn or wheat are open to heavy subsidies but come with equally heavy regulations that must be micromanaged.

Buying land has been a "hot trade" over the past year, and valuations appear extremely rich for farmland REITs with implied cap rates in the 2-3% range, but valuations of higher-quality timber REITs remain quite attractive.

Farmland values averaged $3,380/acre for 2021, up $220/acre (7.0%) from 2020. On a per-acre basis, crop and farmland in California is the most valuable at over $10k/acre, followed by the Midwest at $6-8k per acre and the Southeast at $4-5k/acre.

bill gates' farmland holdings by state (2021)

Farmland REITs exhibit limited sensitivity to economic growth expectations, as food demand tends to be far less cyclical. As it relates to inflation-hedging, however, timber REITs reign supreme in the REIT sector, exhibiting one of the strongest upside correlations to inflation expectations. Farmland REITs are close behind.

U.S. Farmland is one of the largest commercial real estate sectors valued at roughly $2.5 trillion, comprising roughly two million farms - 90% of which are considered small family-operated farms. Farmland consists of row crops (corn, soybeans) - which is the focus of Farmland Partners ($FPI) - and permanent crops (fruits, vegetables) - which is the primary focus of Gladstone Land ($LAND).

Increased global demand for food has been met with a shrinking supply of available agricultural land, but the productivity of this land has increased substantially, roughly doubling in output every 20 years. Farmland leases generally have a 1-3 year term for row crops and a 5-10 year term for permanent crops. Leases are primarily fixed-rate, but some have a revenue-share component.

Farmland REITs delivered an especially strong year with Gladstone Land soaring more than 135% - despite AFFO growth that trailed the REIT sector average - while Farmland Partners gained nearly 40% despite recording a decline in its AFFO/share and flat EBITDA growth.

farmland partners ($FPI) vs. gladstone land ($LAND) ytd performance
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source: tradingview

Gladstone Land currently trades at a forward P/E ratio of 35x, implying investors are optimistic about future earnings. Analysts also assign $LAND a "hold" rating, with a projected 13% upside at a $28 price target. Short interest is bearish, at 6.62% of float, and earnings are projected to grow by 7% annually. Despite heavy short interest, news sentiment around Gladstone remains positive, and we see strong potential revenue growth in the future.

Meanwhile, Farmland Partners trades at a forward P/E ratio of 53x, well above Gladstone Land, and explained by strong outperformance relative to US equities with a 22% gain YTD. Analysts also assign $FPI a "buy" rating, with a projected 2.5% upside at a $15.25 price target, suggesting the stock is near fair value and may soon be sold in favor of deeper value alternatives, like $LAND. Short interest is healthy, at 2.5% of float. Sentiment is also positive, and insiders are consistently buying shares.

Posted 
Sep 9, 2022
 in 
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