The REIT structure?

Headlines in the farmland REIT market this week contributed to the debate about suitable investment structures in agri.

Greetings from New York, where I’ve stopped to meet a number of market contacts before heading to our inaugural Agri Investor Forum in Chicago later this week.

Whether meeting with lawyers, consultants, investment bankers or private equity professionals, it’s clear that how to structure investments remains a big topic of conversation. Will there be a go-to structure for agriculture land investments? And another for agribusiness investments? Does a different structure denote a different return expectation?

One of the related items that New York contacts were buzzing about was the public farmland REIT market that made several headlines this week: Farmland Partners announced a share buyback scheme, Gladstone Land acquired new assets and Farmland LP’s REIT, currently still private, held a first close.

Farmland REITs are very rare. In fact, Gladstone’s listing in 2013 was the first ever. And when compared with more traditional equity capital market deals, they have had a rough ride. Farmland Partners is trading 25 percent below IPO price, hence its decision to buyback some stock, and Gladstone is down 23 percent. Some analysts have blamed the small size of the REITs’ market capitalisations, headlines about commodity price falls and an overheated farmland market.

Others have questioned the suitability of the listed REIT as a farmland investment. The correlation with the public markets and the requirement for REITs to distribute 90 percent of net income after tax are two common complaints.

“Not being able to carry any money over from year-to-year for unexpected expenses or needs is worrying,” argued one lawyer. But that feature of a REIT is also what makes it most suited to the buy-and-lease model where rental incomes can provide investors with appealingly regular income.

Another challenge is the short termism of the equity markets and their tendency to react to headlines. Farmland Partners and Gladstone Lane are hopeful that investors realise it is a long-term play and will not be too fazed by short-term price dips resulting from commodity price falls – which is cyclical – and general stockmarket volatility. And John Baker, chief executive of First Agriculture Holdings (1AG) and previous Asia head of food and agribusiness research and advisory at Rabobank, told us back in Maythat this liquidity will be essential to give investors comfort with the sector.

Regardless, the ability to look beyond day-to-day price moves and headlines will be an important feature of the listed farmland REIT market if it is to succeed. It will also be important for investors to survey the various options within listed farmland REITs because there are different management styles.

Farmland LP, for example, is raising a much larger amount upfront before listing the vehicle (around double what Gladstone and Farmland Partners had raised before listing). It is aiming to deploy the full $250 million of private investment capital and to convert acquired farmland to organic regenerative farmland before the listing takes place. The value proposition will be very different here to the purchase of already up-and-running farms, for example.

And this variance within the REIT structure will be important if we are to fully understand its worth as a structure for agri investment as time goes on.

Farmland REITs may be having a rocky ride at the moment, but it is also worth remembering that there are several farmland private equity funds that are also struggling out there – even from some of the more established investment firms. Aside from infrequent gossip, the fate of those funds will be difficult to measure until they exit. At least with REITs you know where you stand.

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