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Wait and see on farmland REITs – update

Farmland Partners’ decision to buy back stock in order to boost its share price just six months after listing raised questions about the viability of the public REIT as a vehicle for farmland investment.

*adds comment from Farmland LP’s Craig Wichner.

Farmland Partners, the real estate investment trust (REIT), announced last week that it will buy back $10 million of stock in order to lift the REIT’s stock price.

Farmland Partners is currently trading at $10.5 after listing in April this year at $14 a share. Farmland Partners raised $49 million at initial public offering (IPO).

“Our stock is currently trading below where we want it to be,” said Paul Pittman, chief executive of Farmland Partners. “We’re a new company and there are not many publicly listed farmland REITs. I think the market is misunderstanding the difference between farmland ownership and commodity prices. [Our share price] should be trading based on a three-to-five year view of farmland profitability. That’s how farmland rents and values are calculated. Not a 30 day view of commodity pricing.”

The trust’s small market cap, of about $100 million, has not helped, according to Dan Altscher, analyst at FBR Capital, the investment bank. “It’s hard to get institutional investment at that size,” he told Agri Investor.

This has also been the experience of Gladstone Land, a REIT which listed on the NASDAQ in January last year, raising $57 million at $15.00 per share. Most companies “struggle” with their stock price when they are small, according to David Gladstone, chief executive of Gladstone Land. The firm is currently trading at $11.89 and has not engaged in a share buyback in the past.

It can take years to overcome this issue, particularly if there are a lot of short sellers trading the stock, he added.

Craig Wichner, managing partner at Farmland LP, the US regenerative agriculture-focused fund manage, believes that size and the clear addition of value through operations are essential for a successful public REIT. Farmland LP is currently fundraising for a $250 million REIT.

“We believe the minimum size for a public farmland REIT is $250 million, and that it is important to add value as a farmland manager,” he told Agri Investor. “In our case, Farmland LP adds value by converting from commodity cropland into premium crops and livestock, increasing both the value and cash flow of the farmland.”

Much of a REITs survival in the public markets is aligned with investor perceptions about that sector more generally, however, added FBR Capital’s Altscher. Despite increasing farmland rents and farmland values over the long term, recent low commodity prices have pushed some values down in the short term and negative headlines have not helped, he said.

Farmland Partners’ common stock offering in July, when it raised $21 million, was both a help and a hindrance. “On the one hand, the offering raised necessary capital to realise acquisitions in the pipeline. On the other hand, that equity capital was raised below the net asset value, which is a negative for any real estate investor,” said Altscher.

The jury is out on what the future holds for publicly-listed farmland REITs, but the guidance is to wait and see. Being an emerging asset class, farmland still holds a lot of potential. Depending on how stock prices perform over the next year, and if any more farmland offerings go public, the perception of the asset class could become more favourable, according to Altscher.