Northland Securities, the US brokerage firm, is talking to investors about a new investment initiative in the agriculture market — agriculture land mortgages.
The investment bank has entered into an agreement with an undisclosed Farm Credit System lending bank in the Mid-West that is limited in the amount of new mortgages it can issue to the agriculture sector due to capital requirement regulations, according to Brent Behn, vice president, energy and environment finance, Northland Securities.
Alongside investors, Northland will purchase a 50 percent stake in a diversified mix of agri mortgages from the lender who will continue to service the loans and underwrite them while maintaining a 50 percent share. Investors can purchase these pools of mortgages on a separate mandated basis, or investors could co-invest depending on the exposure and size they want, said Behn.
“We think pension funds are a good target,” he told Agri Investor. “Our agricultural fund offers an attractive risk reward compared with other own-and-operate investment models that can be riskier due to uncontrollable variables such as weather and commodity price risk. Own-and-operate investments also rely on land appreciation to maximize returns.”
“In a nut shell it’s really for investors that likes the asset class, prefers an income return and wants some security.”
The mortgages will be diversified geographically across the US and also by sector including timberland, row crops and permanent crops, for example.
The firm is targeting $50 million at first from one or a few investors to get the initiative going.
“At the moment we are identifying the investor pool and narrowing our target investors with serious conversations and will perhaps do an official roadshow later,” he said. “Our plan is to find a single investor, or small group, to invest $50 million in the first pool; we could then expand on that. We really don’t think anyone else is offering this type of agri investment.”
The Farm Credit System lender will be able to provide cheap leverage onto any pool of loans through an extension of the system helping Northland to get gross returns of between 8 percent and 9 percent for investors, according to Behn. That is a boost of 1.5 percent to 2 percent on existing returns.
The life term of the investments is likely to be around six to seven years because that is the typical timeframe for the refinancing of a 10-15 year mortgage.
They are also conservatively priced, he added.
“The loans within the pool typically carry a loan-to-value of about 50 percent to 60 percent which is very conservative compared with historical values,” said Behn. “Our fund will also offer the advantage of structuring in limited liquidity which differentiates our investment from other types of agri-investment.”