Pittman: ‘The publicly traded vehicle is a better mousetrap’

Farmland Partners’ Paul Pittman tells Agri Investor about his strategy to reflect US agricultural output in his portfolio, the size of the farmland market and why he thinks institutions will eventually favour real estate investment trusts when it comes to the buy-to-lease model.

Why did you buy American Farmland Company?

Farmland as an investment class, particularly in the public markets, is in its beginning stages. The first REIT went public three years ago, and we did two-and-a-half years ago. REITs need to get bigger, because the overheads of being listed are expensive. Even at $630 million in assets pre-merger, we are still too small. And AFCO, with around $250 million, are trapped, with stock trading at a material discount to underlying asset value. We will get rid of all overheads. We are [only] bringing over [AFCO’s] president as he has great relationships and connections.

What is your strategy for growing the company sufficiently and getting the right assets?

Farmland Partners is largely in central and southern US commercial row crops. AFCO’s portfolio is Florida or California speciality crops. [Post-merger] it is 75-25 percent, which happens to be what overall US ag output is on a dollar basis. This is the right way. It is a story about global food demand and land scarcity. So keep it simple; create a portfolio that roughly matches total food output, and go along for the ride.

Is it possible to grow as much as you want to, given that the farmland market is thinner than commercial real estate?

When we close this transaction my company will have done $500 million of farmland acquisitions in the previous year. So we have answered the growth question. There is $30 billion of US farmland available per year for sale and no practical limitation on growth. When I watch funds talk about how they have great deal access – they are marketing to people who don’t know when they are being misled. I started my company with $70 million in assets in April 2014 and, and post-acquisition, we will be $850 million. There are lots of opportunities.

What convinces you that the REIT model will succeed over private funds for farmland?

Eventually you have to ask yourself: why anyone would own farmland in a private format if they could in a public format for lower fees? Over time, the publicly traded vehicle is a better mousetrap. Real estate used to all be private funds, and over the course of 20 years it largely became public. And why wouldn’t institutional investors want the New York-listed vehicle with its safety, transparency and oversight? As far as large, renting farmland holders go, I think private funds will gradually disappear.

How do you see the downturn in US farmland prices affecting your business?

This is a get-rich-slowly scheme. We have seen this movie before. The 1980s had a major farm crisis in the US and most major producing regions. These things seem to come in 40 to 50-year cycles. People should not paint such a rosy picture that people say it’s too good to be true. But, if you structure deals correctly you can insulate yourself as a land owner from the near-term volatility of farming. The demand growth that we are seeing during this relative low price commodity cycle is raising fundamental demand for food, which, unlike any other commodity, is asymmetrically inelastic. Once you eat more you never eat less unless you have to. You are building the foundation for the next big run-up in price.