Farmland REITs challenged by succession, markets

The two largest US farmland REITs reported earnings last week, each addressing a distinct challenge to its business model as one observer highlighted to Agri Investor the logic of a potential tie-up between the two.

On Wednesday, Gladstone Land Corporation reported a third-quarter net loss of $247,000 from a portfolio devoted largely to specialty crops. Speaking to Agri Investor Monday, managing director Bill Reiman said that the third-quarter net loss was mostly attributable to it having been a particularly active period for acquisitions.

On the earnings call, Gladstone Land executives detailed a recent instance in which the untimely death of two tenant farmers on adjacent properties forced Gladstone to become direct operators of a property it had leased; not an activity the real-estate focused company seeks to pursue intentionally.

“At that point, it was the last two weeks of planting and we were not able to find someone that would take the farm with just two weeks’ notice at acceptable rents,” chairman and chief executive David Gladstone said on the call. “We had people who wanted it, but they weren’t willing to pay a decent amount. So, we determined the best thing to do is for us to just do the farming.”

For Farmland Partners, which reported net income of $2.6 million for the third quarter on Thursday, the challenge discussed involved the $144.2 million raised in August by offering a little more than 6 million preferred shares. While the infusion of capital did support FP’s $110 million acquisition of 5,100 acres of nut orchards from Temasek-owned Olam Group, chief executive Paul Pittman said on the earnings call that it had been, at least in part, misinterpreted by the market.

“We would, of course, prefer to issue equity to continue growth at reasonable prices, but when the market has made that impossible, the preferred is a very good alternative,” Pittman said. “There is no other place on the planet, besides our stock, where you can buy farmland at a 30 percent discount. So, we have deployed capital to do that.”

As of August, FP’s portfolio consisted of 154,000 acres on 318 farms spread across 17 US states growing more than 30 crops, though mostly devoted to row crops. Gladstone Land’s specialty-crop portfolio currently constitutes 63,000 acres growing 39 different crops on 73 farms in 18 different growing regions valued at $533 million.

Unity is strength

A market source familiar with both companies pointed out what they labelled as an “interesting dynamic” between the two companies and their portfolios.

Both Gladstone Land and FP, the source said, are largely ignored by stock market investors and just at or well below the $1 billion in assets under management thought to be a requirement of investors focused only on REITs. That said, the source highlighted that the two companies’ portfolios, with corresponding concentrations on specialty and row crops, could make for a viable combination.

“In a perfect world, if you had to build a portfolio that was diversified, melding those two companies would, at least on the surface, seem to make sense,” the source said. “In the next couple of years, if there’s a stagnant capital-raising environment on the public side and they are not able to continue to build their scale, there could be definitely be discussions in that vein.”

University of Illinois professor and TIAA Center for Farmland Research director Bruce Sherrick told Agri Investor that, while he doubted that FP and Gladstone Land would ever merge, each faces the same challenge of how to build scale.

“Both will always be looking for sensible merger candidates,” he said. “I don’t know that a REIT to a REIT necessarily is any more favorable than a REIT to any other fund.”