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PGIM expects steady farmland dealflow as valuation uncertainty continues

Chief investment officer Jamie Shen says the aftermath of California wildfires has led to a ‘wild ride’ for ag but has given the firm a chance to demonstrate its skill in managing risk.

PGIM expects its farmland transaction volumes to mirror 2019 levels, although the executive leading its agricultural unit says differing outlooks have slowed the pace of deals in certain markets.

“If you are looking to buy new almond properties, you have to ask how fast prices can rebound from the low point they hit this summer,” PGIM real estate chief investment officer for agricultural finance and investments Jamie Shen told Agri Investor. “We are being very careful in our underwriting about how fast we think prices might rebound – and if they might rebound.”

Shen said projections of a record almond crop helped drive down pricing for almond properties earlier this year, which are among the most prevalent property types in PGIM’s farmland portfolio. In the time since August, she added, strengthening almond prices have brought about a rebound in sentiment for the crop, further complicating a land market characterized by a widening bid/ask spread that has already kept PGIM from acquiring at least two properties it wanted.

“Back on December 31, there wasn’t this big expectation of this big almond market and so the pricing was very different than it was in August or where it is today even. The appreciation component on those properties has largely not been revalued since this pricing shift,” she said.

“I think everyone is interested to see how appraisers account for the pricing change, if they account for the pricing change or if shipments will have changed to a point that pricing might rebound even further by December 31, when a lot of people are getting their appraisals.”

Despite current confusing conditions in the market, Shen said deals are getting done and PGIM expects its overall farmland transaction volume in 2020 to mirror that of 2019 by year end.

‘A wild ride’

Properties in California account for a large portion of PGIM’s permanent crop-focused portfolio, which was cumulatively valued at  $1.2 billion in February.

Shen said the majority of the firm’s attention in recent weeks has been devoted to managing the aftermath of summer wildfires on the West Coast. In addition to determining and mitigating the degree of smoke taint or damage on crops and navigating related insurance claims, she said, the effort has also included increased communication with LPs.

“It’s been a little bit of a wild ride out here, but it’s still fun and our portfolio is holding up pretty well,” Shen said. “Farmland is not a risk-less asset class. This just highlights the risks and how we manage those risks.”

As ever, Shen said, water remains among the key risks PGIM is managing for its farmland investor clients. Though covid-19 has led to some delays in implementation milestones for California’s Sustainable Groundwater Management Act, Shen said PGIM is already prepared for full implementation of the legislation and has been for some time.

Shen added that although there were some market participants who, following SGMA’s 2014 passing, seemed to be waiting out a regulatory process they expected would never materialize, the majority of investors active in California today are working to adapt to the law they see as a reality.

“There’s other people in the market that are not institutional investors that might have different risk tolerances that might try to get a quick near-term return and give up the near-term value of the land, but I do not see a lot of institutional investors doing that kind of activity,” she said. “Now, people realize the reality that time is ticking and full implementation is getting closer. People are more accepting of the reality of it today than they were five years ago.”

PGIM is the investment management business of Prudential Financial. According to a February overview, PGIM manages farmland for four single account clients, one partnership with a public pension fund and a collection of bank and high-net-worth investors. In March, the $77.3 billion Massachusetts Pension Reserves Investment Management Board made a commitment of up to $500 million to a separate account to be managed by Prudential Agricultural Investments, the unit of PGIM devoted to institutional accounts.

Shen said though travel restrictions have introduced complications for many investors considering investments with new managers during the months since the spread of the covid-19 pandemic, she has nonetheless seen evidence that LP interest in farmland continues to grow.

“What we are seeing is people who we were talking to before covid continuing to march down that path and carrying on with those decisions.”