In May we spoke to John Baker, chief executive of First Agriculture Holdings and former Asia head of food and agri research at Rabobank about the opportunity for real estate investment trusts. It was the second most-read story of the year as managers and investors alike considered how to structure agri investments and find liquidity in a traditionally illiquid sector.
One of the biggest challenges to investing in agri today is liquidity, argues John Baker, chief executive of First Agriculture Holdings (1AG) and former Asia head of food and agribusiness research and advisory at Rabobank.
“When I talk to sophisticated investors about investing in things like agri land, one of the major investor issues is liquidity,” Baker told Agri Investor. “If you don’t have that, it changes the whole risk prism through which sophisticated investors view the investment.”
It is for this reason that Baker launched 1AG and plans to list a $500 million real estate investment trust (REIT) on the Singapore stock exchange in the next few years.
“I had a vision of creating new investment pathways for funding to find its way into the agribusiness sectors as I could see that there were some constraints,” he said. “Food and agriculture is not exactly a mainstream investment class today, which is mostly driven by a lack of familiarisation with agri related risk. However, I am confident it will become mainstream one day.”
Baker believes that a REIT, comprising of buy-and-lease investments across the supply chain from agricultural land to ports to storage and processing, will make the asset class more investable. Having assets with a similar earnings capability — from rent — will also help to correlate them more closely.
He also argues that a buy-and-lease model is better able to connect the risk and reward of an investment because the leasing value of land can be directly influential in its overall value. By comparison, own-and-operate land investments can suffer from low cash returns during their life and in some instances the land value does not appreciate enough to provide an attractive kicker.
“The argument around the equity return gap is usually justified by the non-cash equity growth the investor would receive as the land appreciates over time,” he said. “That’s where the problem starts. In Australia, agricultural land values have generally fallen since the global financial crisis, which has caused the equity returns of many investments to struggle in satisfying return hurdles expected of investors.”
“If REITs and other similar sale-and-leaseback structures begin to become more prominent in the ownership of agricultural land and other agribusiness assets, and we are starting to see more and more evidence of this, then earnings based valuation models for agricultural land in particular will become more commonplace. The change and acceptance of this valuation methodology is key to attracting larger fund flows from mainstream sophisticated investors. If this occurs, I am confident that agriculture land ownership can become a mainstream investment class,” added Baker.
Before joining Rabobank, Baker worked in the asset management industry in Deutsche Asset Management’s complex assets group. But he is uncomfortable with the ‘2 and 20’ fee structure that many private equity funds charge. “I am just not sure it is suited to the agri land asset class,” he said, as other asset managers have told Agri Investor in the past.
Baker therefore launched 1AG in 2012, an investment holding company based in Singapore, and brought two investors on board — Hemant Bhatt, former chief executive of Louis Dreyfus Commodities and Halcyon Strategic, a member of the Halycon Group which operates a Singapore-listed rubber processor with operations in Indonesia and Malaysia. Together they make investment decisions.
And Baker is open to new investors in 1AG should they fit the profile.
“Our motto is to keep things simple and straightforward,” he said. “Our prima facie focus initially was not the retail investor, although I believe that in order for agribusiness to flourish it must find a way to tap retail funds, and ultimately become a mainstream investment class.”
The holding company is now looking for investment exposure across the entire agri value chain, in Asia Pacific, to put into a REIT; assets that it can lease on to farmers with illiquid balance sheets and intermittent cashflows and onto large well-capitalised supply chain managers, retailers and processors that have much stronger cash flow business models.
“Investing into a self-reinforcing blended supply chain risk could make agrifood investment more attractive compared to a pure farming investment play,” said Baker.
But the REIT will need to be at least half a billion dollars to work, according to Baker. “With REITs you need to start with a scale portfolio, which differs from other investment approaches to agri investing that centre around aggregation over time.”
Creating a REIT of this size will require a lot of coordination as the deals will need to be executed at the same time. And this could take some years to organise, warned Baker. There will also be the external risks associated with competitive bidding processes and other external factors; there are a lot of caveats, he added.
Listed agribusiness funds have not had the best reception in the past, sources have told Agri Investor. Is this a worry for Baker?
“Trading liquidity is a concern but this is why you need to start with a very large asset portfolio. Large scale agri REITs do not exist today and certainly smaller vehicles will probably struggle with liquidity. But we remain convinced that there is room for a large scale agri food REIT.”
Baker is not totally adverse to the private markets and will be concurrently searching for private equity investments to be made by the holding company; the holding company will also have a stake in the REIT and own the management company.
Baker has also worked at Louis Dreyfus and the Australian Agricultural Company during his 18-year career in food- and agribusiness-related mergers and acquisitions, private equity, and research and advisory disciplines.