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- Farmland is a stable asset class attractive to investors looking to diversify and hedge against inflation.
- Farmland crowdfunding and low-cost investing options, such as farmland REITs, have made investing in farmland more accessible to everyday investors.
- Farmland REITs are real estate investment trusts that hold farmland and allow investors to receive dividends from renting the land to farmers.
- Farmland REITs can be equity or debt REITs, with equity REITs being more volatile but offering higher potential returns.
- Gladstone Land Corporation (LAND) is a farmland REIT that owns 131 farms across the US and pays monthly dividends to its investors.
Throughout the ups and downs of the economy, farmland has consistently ranked as one of the most stable asset classes.
Farmland is an attractive choice for investors looking to add a hedge against inflation and diversify out of stocks.
However, investing in farmland has historically been complex for a new investor. Previously, you would be required to save enough cash to purchase an entire piece of land outright. This could represent thousands and thousands of dollars, not to mention the significant time investment required to get started.
Subsequently, the rise of farmland crowdfunding platforms and other low-cost methods for agricultural investing has opened the door to everyday investors. One of these methods that are particularly attractive for smaller investors is investing through a farmland REIT.
In this article, we provide a review of REITs. What are they? And what are their advantages? Furthermore, we also take a look at the best farmland REITs available. So let's jump right in!
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What Is A Farmland REIT?
Ok, let's start first by defining a REIT.
A REIT or “real estate investment trust” is a company created to hold real estate.
In the case of a farmland REIT, that real estate would be none other than farmland. After forming the company, investors raise capital to invest in various parcels of land.
After the formation of the trust, farmers can then rent the land from the REIT, and investors in the REIT receive periodic dividend payments.
By investing in farmland, investors can take advantage of this asset class's consistent returns.
At the same time, they avoid the responsibilities of owning and managing a farm. Unfortunately, returns are often the lowest for this type of farmland investment.
The REIT handles the management and logistics while the investors sit back and receive their dividends.
What makes REITs particularly attractive to investors is how easily they can be bought and sold. This is referred to as liquidity. In addition, REITs trade on the same exchanges that stocks do, meaning you can buy them in the same manner.
The level of liquidity found in farmland REITs is drastically higher than investors see in traditional farmland investments.
However, that liquidity can and will work against you in a market sell-off. REITs are highly correlated with the stock market.
Debt vs. Equity REITs
REITs typically fall into one of two categories: equity REITs or debt REITs. The distinction between the two comes in the type of assets they invest in.
- Equity farmland REITs will pool their cash to purchase entire parcels of farmland and then rent them out to farmers.
- Debt farmland REITs will instead lend farmers to expand their operations or purchase more land.
In general, equity REITs tend to be more volatile than debt REITs. This is for several reasons, one of which is that there is much more certainty with debt REIT returns.
- With a debt REIT, the loan likely has a standard interest rate and payment schedule. This means investors know when and how much they will get paid back.
- With equity REITs, on the other hand, there is no set schedule of returns, and disruptions in farm operations could create issues for investors.
Some farmland REITs will pursue both debt and equity investments. These are hybrid REITs and generally reap the benefits of debt and equity investments.
Taxation Of Farmland REITs
Provided they follow specific guidelines around how much of their income they payout to investors, REITs receive special tax treatment.
Instead of being subject to corporate tax, REITs can pass along their income to investors pre-tax. However, once investors receive these dividends, they are taxed as ordinary income.
This differs from stock dividends, sometimes treated as capital gains.
Investors who sell their shares in a REIT receive capital gains treatment.
If they hold the REIT for over a year, it will be taxed at favorable long-term capital gains rates. However, if held for less than a year, it would be taxed as short-term capital gains, the same as ordinary income.
Best Farmland REITs
With all that out, let's now cover the best REITs for investing in farmland.
Unfortunately, the options are limited.
Nonetheless, here's what you need to know about the two farmland REITs available to investors today.
1. LAND – Gladstone Land
Founded in 1997, Gladstone Land Corporation was the first farmland REIT to enter the scene. The company owns and leases farmland with cooling, packing, processing, and storage facilities.
As of the latter part of 2021, Gladstone has grown to a total market cap of just over $800 million. However, as of April 2023, the total market cap has fallen to $586 million.
Gladstone owns 131 farms totaling nearly 113,000 acres of land across the US in 14 different states. Fifty-two farms are on the West Coast, with the majority in California.
The farms owned by Gladstone are diversified in terms of location as well as crop type. Across the 131 farms, 45 different kinds of crops are grown. However, the company focuses on fruit and produce ground when looking for new farms to acquire.
Gladstone follows a traditional equity REIT model.
It generates income for investors via purchasing farmland from farmers or investors and renting it out to farmers.
Gladstone historically pays monthly dividends to shareholders and has produced 93 consecutive monthly cash distributions since its initial public offering in January 2013.
Gladstone pays out monthly dividends to investors and has a current dividend yield of 3.33%. This is comparable to other farmland investment options.
Over the last five years, LAND stock has appreciated about 33%. This has yielded respectable returns for LAND investors over the past few years.
Over the last year, the stock has experienced a significant downturn,
Unfortunately, any REIT is susceptible to the “boom” and “bust” cycles of the stock market.
2. FPI – Farmland Partners
Farmland Partners wasn't the first farmland REIT, but they have overtaken LAND in terms of total market cap in recent months. They are a bit larger than LAND, with a market cap of $602 million.
FPI had its IPO in 2014 and now owns over 160,000 acres of land across 17 states. They also manage another 30,000 acres of farmland.
The company believes that the US is the world's most attractive agriculture market to invest in. They see significant potential for rising productivity, decreasing farmland mass, and increasing demand for food as bullish indicators for farmland.
Low overhead costs of less than 1% of assets and economies of scale have allowed FPI to proliferate. While the company has focused on core investments in high-quality US farmland, they are also selectively considering exceptional opportunities.
FPI aims to work with farmers to lower their input costs and improve their farms. As a result, they can increase the profitability of both farmers and shareholders. In addition, FPI is capitalizing on the increasing global demand for food, feed, fiber, and fuel.
Across all of their different farms, over 25 different crop types are grown, and over 100 tenants.
This type of diversification is something other than something you would have with an individual investment directly into a single farm. So one of the benefits of farmland REITs is being well diversified across many different plots.
The dividend yield for FPI is currently 2.23%, which is par for most farmland investments.
Dividends are paid quarterly.
Final Thoughts: Best Farmland REITs
REITs allow investors to get started with farmland without the traditional high capital and time investment cost.
In the end, both REITs share more similarities than differences. A lot of it comes down to the track record and your preference on monthly vs quarterly dividends.
Keep in mind; there may be better options than a REIT. For example, consider a direct farmland investment platform if you have a sizable amount.