The public-private wedlock

They appear competitors, but publicly-traded farmland investment vehicles in the US and their private market counterparts support each other indirectly.

The two publicly-traded farmland investment vehicles in the US – Farmland Partners (FPI) and Gladstone Land – offer a wealth of information useful to anyone attempting to understand private farmland markets.

Details about lease structures, trade and weather challenges, logistics and recent transactions that private managers are often reluctant to share are discussed openly on quarterly earnings calls, with individual farmland deals heralded by press releases during the months in between.

For those attempting to make private investments in US farmland, the relationship to public farmland managers is more complicated. Managers on either side of the public/private divide find themselves competing for the same properties. Both sides operate in markets where the other plays some role in shaping overall sentiment and in setting the terms of partnership with producers.

That fact that publicly-traded farmland REITs advertize themselves as offering “relatively modest” annual returns of between 6 and 8 percent with low volatility plays a role in supporting the rationale for commitments into private agriculture funds, Fiera Comox partner Bob Saul tells Agri Investor.

Even in a market with a growing list of investment-grade private ag-focused managers, Saul says, institutional LPs new to the market are likely to begin investigating private farmland as an asset class by examining its public counterpart.

“One of the problems that we have had in many of our land-based assets is that we have had ‘over-promise and under-deliver’,” says Saul. “When you see the kind of returns that Gladstone advertises, as well as what they’ve actually returned, then your expectations are appropriate.”

Recent developments at FPI, however, have highlighted the challenges all public companies face.

On its fourth quarter earnings call last month, FPI chief executive Paul Pittman detailed the impact of a July Seeking Alpha post alleging improper disclosure of a lending program. Posted under the pseudonym of Rota Fortunate, the article had, according to Pittman, essentially stopped the company from making new acquisitions, cost it new business partnerships and dented the morale of employees.

“Everything going on in our business is right out in front of everybody,” Pittman told Agri Investor last week. “Everything going on in Hancock’s business or Westchester’s business is not right out in front of everybody.”

Judging by the number of clicks on a recent Agri Investor story, FPI’s travails have also raised hopes some of its farmland would end up in private hands.

FPI had begun working on its first asset sale even before the Rota Fortunate article was posted. On last month’s earnings call, Pittman said he expected as much as $37 million in asset sales to come through this year, as part of its effort to recover from the drop in share price that followed the article’s publication.

Speaking about FPI’s $1.2 billion portfolio – which comprises 162,000 acres across 17 states – Pittman highlighted it was pulled together just since 2013 on the back of having realistic expectations and understanding local pricing signals.

“So many of these institutional investors think that the farmers are all dumb. They believe the headlines in the newspaper and think they are going to be able to buy this stuff for pennies on the dollar and you can’t – you just can’t,” he argued. “You cannot build a nationwide business of scale trying to find desperate sellers and buy things cheaply.”

Regardless of whether any of FPI’s expected sales are completed directly to private managers, the reality is prices for its properties are likely to find support in the form of institutional investor demand.

And while Pittman currently casts rapacious private managers as a foil against which to juxtapose his company’s more transparent approach, it seems likely his firm and Gladstone will increasingly see private capital as among their partners, especially within small markets.

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