Area One Farms targets C$200m for Fund III – exclusive

The firm is seeking to raise funds from institutional investors for the first time, after raising its first two funds from family offices.

Canadian farmland-focused investment firm Area One Farms is targeting C$200 million ($151 million; €137 million) for its third fund, its first fund open to institutional investors.

Area One Farms Fund III will co-invest with farmers looking to scale up their operations,  following the strategy from its previous vehicles, founding partner Joelle Faulkner told Agri Investor.

Faulkner added Fund III garnered $30 million in commitments by its first close in late 2015, and  her firm would continue fundraising until a final close at the end of 2016.  It intends to hold its next close in September. The fund will last for 10 years and target returns of 15 percent per annum.

The prior vehicles raised $21 million in 2013 and $10 million in 2015 respectively. Both are now fully deployed.

“We are equity investors, not debt investors. Each farm holds a farm-level mortgage, but we actually co-invest in the land and its improvement. We make capital investments [by] converting land – bringing more land into production– and we operate, all in partnership with the farmer,” said Faulkner on the firm’s strategy.

Some Canadian provinces, including Saskatchewan, restrict investment in farmland from institutional investors. As a result, Area One only targets regions where these LPs have access, but its operator co-investment model is an attempt to reform the way such large funds participate in Canada’s farmland market. Accusations of buy-outs distorting land values and seeking to benefit from an aging population of farmer-operators facing succession choices have generated support for restrictive measures.

Area One Farms has targeted farms with arable land that has gone out of use.

“It used to be farmed 30 years ago and we convert it back into productive agriculture,” she said. “Canada has pockets of fertile, but uncultivated land, with full water sustainability. In fact, historically many of these areas had excess rainfall, making farming more difficult. Converting this land into farmland mostly requires the installation of systematic tile drainage. The extra capital is a barrier for most farmers, but the returns make it look like Brazil in Canada.”

Faulkner added:  “We have aligned incentives for profitability and sustainability. Reputation-wise, it is very well received because ownership is maintained and grown locally.”

The firm targets land across east and west Canada. It focuses on specialist annual crops like peas, lentils, white beans and buckwheat, and has ultimate budgeting and operating control over its joint venture farms.

Joint venture farmers do not pay rent or receive a salary. Instead, they earn a return on their invested equity, a percentage of operational returns as income and a portion of appreciation at disposition.

“Through [their] co-investment and added incentive, the farmer acts as built-in liquidity. He will purchase all or a portion of the farm back from investors at fair market value. The remainder will be sold locally,” Faulkner said.

Fund III has already invested all of its raised capital in two farms in Ontario and one in Alberta. Faulkner said that as farmers are beginning to make succession plans, many are looking to scale up operations to bring on family members or make farms more commercial, meaning that there is a sustainable pipeline of deals.

According to company documents, the $21 million Fund I total net returns stood at just under $14 million including management fees and interest in December 2015.  It is returning approximately 3 percent a year in cash returns through operations after all fees, with the remainder generated from market appreciation and added value.