Managing partner Craig Wichner told Agri Investor the San Francisco-headquartered organic farmland fund manager expects to close the sustainability bond by the middle of 2021.
“The organic food market is growing at double digits; the organic farmland market is growing at single digits – why is that? In part, because the debt markets for organic farmland conversions are kind of broken,” said Wichner, who founded Farmland LP in 2009.
“The existing lending options have a hard time fitting the cashflow model in with the organic conversion,” he added.
Converting a conventional farm to organic can take several years to complete fully and requires significant financial investment.
Farmland LP manages 15,000 acres planted in more than 40 organic, permanent and high-value crops across California, Oregon and Washington. Its strategy involves farming and leasing of conventional farmland properties that have been purchased and transitioned to organic production.
Wichner said despite potential rental increases from about $250 to $700 per acre following conversions, access to debt has held back growth of the organic sector.
“What we’re exploring is: is there an appetite in the market for helping speed the conversion of farmland from conventional to organic and what would that look like from a rates perspective?”
Proceeds from the sustainability bond will add to working capital and refinance debt on Farmland LP’s two existing vehicles, which collectively manage about $175 million in assets raised largely from family office, endowment and wealth management investors, according to Wichner.
He explained the firm expects the bond will lower financing costs from the approximately 5 percent interest rates currently available through traditional farmland lenders to as low as 2.9 percent from a bond market, demonstrating “intense” demand for scarce high-quality ESG-related offerings.
In looking to tap growing demand for ESG assets among bond investors, Farmland LP is joining a $1 trillion green bond market that saw $270 billion of issuance in 2019 and an even stronger pace in 2020, according to a recent PGIM report. Wichner said many of those instruments were extended to traditional real estate borrowers, but existing options for green bond investors interested in ag are currently limited to only a few conventional farmland REITs.
A HIP Investor rating report for Farmland LP’s sustainability bond describes the environmental benefits and business case for organic conversions, highlighting leading berry distributor Driscoll’s’ increase of contracted acres with the firm from 50 to 300 over a three-year period.
HIP’s report also includes an estimate of $74.3 million in ecosystem service value derived from the firm’s management of its current portfolio. Wichner confirmed that estimate used the same methodology presented in a 2018 USDA-sponsored report that estimated the added ecosystem value of its then smaller portfolio at $21.4 million.
Such measurements, he said, are important to the cohort of large financial institutions, pension funds, insurance companies and other lenders who have historically kept their exposure to farmland limited in a way that often excludes organic properties.
“We’re trying to help create a vehicle to help more debt capital come into the space and that will also help grow the equity side of things and help more farmland be converted to organic and help US organic farmland to meet current market demand for organic food,” he said.
“We’re having to be the pioneers and trailblazers. Do I wish that there was already a 10-year track record of $100 million, $1 billion, $10 billion offerings that we could say: ‘We’re just like them?’ I do.”