Toronto-headquartered investment firm Area One Farms has launched a pair of funds in order to stay within the letter and spirit of ownership restrictions in Canadian markets, according to its co-founder and president.
Area One Farms Fund IV will offer institutional investors in Canada exposure to farm partnerships in every Canadian province except Manitoba and Saskatchewan. Area One Farms Fund V will offer Canadian individuals, corporations and trusts with no non-Canadian beneficiaries access to investments in those two provinces, where farmland acquisitions are limited by local legislation.
Fund IV, which has already secured a C$100 million ($78.3 million; €65.7 million) commitment from an unnamed Canadian institution, is structured as a traditional 10-year closed-ended fund. Fund V is a perpetual entity with plans for liquidity options starting after five years.
“Most Canadian farmers are actually not particularly interested in a methodology of growing where they would become long-term renters”
Joelle Faulkner, Area One Farms
There is no specific target for Fund V, which co-founder and president Joelle Faulkner told Agri Investor she expects will stay “relatively small” and accept minimum investments of C$100,000. Fund IV will target C$250 million, she said.
Like their predecessor, Funds IV and V will target low-teen returns, according to Faulkner.
Fund III closed on C$130 million in July after enticing commitments from mostly Canadian endowments, pension funds, high-net-worth individuals and insurance companies. Investors in the vehicle included Canadian insurance company Sun Life Financial, according to Harvard Business School.
Faulkner declined to specify if the Canadian institutional investor that has already committed to Fund IV was a limited partner in any previous Area One vehicles.
A worthy endeavor
Faulkner explained that she supports the land-ownership restrictions that require her firm to set up separate funds and considers protection of farmland ownership by local and family farms to be a worthy endeavor.
“While I think our model of supporting farmers probably fits better with that than many other models, I still give a lot of credit to places that have decided to […] create a much more limited way of buying land,” Faulkner said.
Despite widespread perception that ownership restrictions were put in place in response to specific investments, she explained, the regulations in Manitoba and Saskatchewan had long been in force on other provinces well before they were gradually removed in recent decades. When citizens in Manitoba and Saskatchewan wanted to react to land purchases by the Canadian Pension Plan Investment Board in 2015, Faulkner said, regulations there were tightened to exclude institutions with even a single non-Canadian beneficiary.
“Everybody talks about it like it all changed, but it didn’t really,” said Faulkner. “It really was like that, except Canada Pension Plan used to qualify and doesn’t anymore.”
“You need a staff at 1,000 acres and a team at 3,500 acres. When you get past 7,000, you have to manage people who manage teams”
Joelle Faulkner, Area One Farms
Area One’s strategy focuses on undertaking land conversions on undervalued properties and forming partnerships with Canadian farmers that are designed to encourage the inter-generational transfer of farmland. In addition, Area One favors sustainable farming practices and encourages knowledge-sharing among farmers it invests with on issues such as adding irrigation systems, working with local government on relevant infrastructure projects and improving soil health.
Farmers that Area One invests with are given the option to purchase back as much of the farm as they can afford at the end of a 10-year period. Faulkner explained that Area One’s approach suits conditions in the Canadian market, where farmers tend to expect they will be able to maintain equity ownership.
“Most Canadian farmers are actually not particularly interested in a methodology of growing where they would become long-term renters, which is somewhat distinct from the US,” Faulkner said.
She added that Canadians tend to be slightly more risk-averse, and that inheritance laws have allowed them to keep more of their land, meaning they continue to be largely owner/operators. “Their understanding of how to build a stable home and farm is actually to build it as an owned/operated system.”
Keeping it Canada
Faulkner said that Funds IV and V would only make investments in Canadian farmland, though Area One’s consideration of a possible entry into the US market was the subject of a Harvard Business School case study published last month.
The case study also provided an overview of the firm’s development, strategy and approach to farmland investments.
It cited Faulkner as saying that 80 to 90 percent of farmland for sale never went on the public market and stated that Area One was able to draw upon its local networks to secure farmland in Ontario, well-suited for conversion, for as little as C$500 per acre. Half of Area One’s partnerships involve converting uncultivated land, according to the study, which said the firm expects “ready-to-farm” properties to produce 12 percent annualized returns. Land conversion projects are expected to yield around 18 percent returns after five or six years.
“She was willing to give up some land appreciation to the farmer, given that Area One received operational knowledge and the ability to buy good land cheaply in exchange,” the study’s authors wrote.
“I still give a lot of credit to places that have decided to […] create a much more limited way of buying land”
Joelle Faulkner, Area One Farms
The case study detailed Faulkner’s position that existing farmland investment structures were too favorable for capital providers and that farmers are best incentivized by the ability to own their land and let it appreciate. The authors wrote that Area One targeted 15 percent net IRRs on all of its investments, with 15 percent of net profits shared with farmers in addition to their receiving a pro-rata proportion of remaining profits based on the size of their ownership.
Harvard also cited challenges Area One has encountered as it has grown, including partnerships that failed after farmers added properties too far from their main operations, disagreements about equipment purchases and other obstacles that come along with growing scale.
“You need a staff at 1,000 acres and a team at 3,500 acres. When you get past 7,000, you have to manage people who manage teams,” Faulkner told the authors. “So, how do you actually create more capable managers overnight? We are working on that issue, too.”
Though the study does not explicitly say that Area One decided not to expand into the US, it does provide some indication of factors that could keep the firm fully focused on Canada.
Faulkner thought of US farmers as being more comfortable with debt, but generally less reliable than the farmers Area One traditionally works with. That was due to the lack of a supply management system such as the one that exists in Canada, according to the case study. In addition, according to its authors, Faulkner thought a US investment partner with the required local networks would seek to dilute the farmer-friendliness of Area One’s contracts.