Homestead targets $500m for fourth farmland fund

Fifteen percent of the vehicle’s strategy will be devoted to loans of up to $25m to row and permanent crop operators who will be advised by the firm’s network of regional farm managers.

Homestead Capital is targeting $500 million for the fourth iteration of its flagship farmland fund, which will support its first foray into agricultural lending.

The Rhode Island State Treasury approved a commitment of up to $52 million to Homestead Capital USA Farmland Fund IV at a late September meeting of its State Investment Commission, according to minutes posted in November.

In a presentation to the Treasury, Homestead described its experience as including 108 transactions as of July and detailed case studies in vineyard development, organic conversion and wetland mitigation projects. Fund IV will target $500 million and have a term of 15 years along with a 1.5 percent management fee and carried interest of 15 percent, according to the presentation.

Rhode Island private assets portfolio manager Saul Ioffe noted the Employee’s Retirement Pooled Trust (ERSRI) is an investor in the firm’s third fund, which is performing in line with expectations. He recommended ERSRI make a $50 million commitment to Fund IV as well as a $2 million commitment to the vehicle by Rhode Island OPEBV System Trust, which is also administered by the Treasury.

Homestead closed its third fund on $596 million in November 2020.

A memo from Rhode Island staff described Fund IV as a continuation of Homestead’s value-add farmland strategy, which focuses on acquisitions and improvements to undervalued farms in the US Midwest, Mountain West, Delta and Pacific regions. Common improvements pursued by Homestead include new crop rotations, precision leveling and irrigation systems improvements.

“Homestead will hire top tier farm operators and implement a mix of leases to manage risk, ranging from pure yield plays through cash rents where Homestead takes no price risk to direct or custom arrangements where the fund is responsible for all costs and decision-making in exchange for receiving all the farm income,” according to the memo. “This compares to many peers who often employ a predominately cash lease approach and rely almost exclusively on yield for returns.”

The memo also highlighted Homestead’s “differentiated approach to farmland investing,” which they attributed to its network of independent regional farm managers, most of whom derive a majority of their business from the firm.

“As the firm has matured, Homestead has also increasingly sourced directly from within its own network of farm operators and service providers. Through its differentiated sourcing, Homestead is often able to acquire farms on a bilateral or limited competition basis,” they wrote.

An additional memo from consultants Cliffwater clarified that Homestead has structured its regional farm manager relationships in part with an eye toward preserving those individuals’ access to farmland owners who are typically over 60 years of age.

“All 16 RFMs are under contract to provide Homestead a right of first look on farmland within their regions. The RFMs are compensated through a percentage of farm income and may accrue a bonus out of a pool of capital retained from the management fee,” the memo explained. “The bonus is only paid upon a successful exit that achieves the underwritten performance targets.”

Cliffwater’s memo explains that Fund IV’s strategy will mark Homestead’s expansion into agricultural credit, through an up to 15 percent allocation to loans of between $5 million and $25 million extended to as many as 45 row and permanent crop operators. It explains Homestead plans to use its RFM network to ensure best practices among farm operators it lends to.

Rhode Island staff’s memo noted that Homestead has launched a “sister company” called Revive, which is dedicated to operating farms using “technology-enabled climate smart farming practices.” Revive describes itself as using proprietary technology to address challenges to climate-smart agriculture such as fragmented patterns of ownership and control, insufficient short-term financial incentives for farmers, challenges of collecting and analyzing environmental data and limited market access.

“Homestead will assess potential benefits of utilizing Revive to manage its assets at market-clearing rates,” the Rhode Island memo’s authors wrote.

The San Francisco-headquartered Homestead managed $1.1 billion as of a December filing and maintains field offices in Little Rock, Arkansas; Mahomet, Illinois and Idaho Falls, Idaho.