According to materials presented at the $33.2 billion pension’s September board meeting, ARMB’s fiscal year 2022 plans call for up to $300 million to be deployed into farmland as market conditions allow. Steve Sikes, manager of opportunistic strategies and real assets, wrote in a memo that ARMB’s existing $100 million allocation was recently activated in the UBS rotation.
Sikes’ memo explained ARMB’s US-based farmland portfolio has historically provided an attractive mix of income and appreciation despite returns that have diminished over time in line with US Treasury rates.
“Longer term underperformance compared with the benchmark is due to an underweight to permanent crops,” Sikes added. “UBS will be looking to add permanent crops with the additional allocation.”
ARMB’s farmland portfolio is comprised of 85 percent row crops and 15 percent permanent crops. Last June, it terminated a combined timber and farmland mandate managed by Hancock Natural Resources Group as part of a consolidation aimed at reducing fees.
The September materials show UBS took over management of farmland previously managed by Hancock as the “Northern Agriculture” portfolio in October 2020. As of late June, those assets were combined with others UBS had assembled for ARMB since 2004, which included 88 investments in 25 major crops with a total value of $895.5 million. The farmland portfolio is called “Midnight Sun”, of which 23 percent in located in California.
According to a UBS presentation contained within the September meeting materials, 40 percent of ARMB’s California farmland faces “extremely low” risk related to California’s Sustainable Groundwater Management Act. UBS wrote the 28 percent of California assets located in the lower San Joaquin Valley, which contains basins governed by SGMA, all have more than one water source. The 27 percent located in the Salinas Valley are, in the firm’s view, more at risk from the reduced flows of the Salinas River than from SGMA.
“Reductions in groundwater pumping limits will be decided at the local level and result in a wide variety of impacts ranging from no impact to required fallowing,” according to the report.
UBS highlighted that it deploys permanent crop lease structures that mitigate risks associated with California wildfires that have increased in size, scope and damage in recent years. One of the Midnight Sun properties, for example, provided cash rent returns last year despite a near-total crop loss, according to UBS.
“If we directly operated, that vineyard would have returned a negative income return due to the operating loss,” the firm explained.
ARMB timber assets previously managed by Hancock under the “Salmon Timber” portfolio have been added to an existing account called “Mountainside Timber” with Atlanta-headquartered Timberland investment Resources.
According to the September materials, the assets previously managed by Hancock included properties in Alabama, Oregon and Washington valued at $100 million. As of late June, ARMB’s 160,575-acre timber portfolio was valued at $366.9, according to TIR.
Sixty-six percent of the 17-asset portfolio is located in the US South, which TIR highlighted is expected to see an additional 12 percent of lumber production capacity added by 2024.
“Timberland returns have been frustrated primarily by lack of growth in sawtimber prices. Price is expected to improve from strong mill growth in the US South. A meaningful part of ARMB’s portfolio will be transitioning to higher value sawtimber in the coming years,” wrote Sikes. “Sector returns have not met original 5 percent real return expectations, but current market trends are positive.”