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Farmland has remained one of the more stable asset classes throughout the ups and downs of the economy.
For investors looking to add a hedge against inflation and diversify out of stocks, farmland has remained an attractive choice.
However, it has historically been fairly difficult to invest in farmland as a newer investor. In the past, you had to pony up enough cash to purchase an entire piece of land outright. This could range anywhere from $100,000+ and involved significant time investment as well.
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 is particularly attractive for smaller investors is investing through purchasing a farmland REIT.
What Is A Farmland REIT?
A REIT or “real estate investment trust” is a company created for the sole purpose of holding farmland. After forming the company, investors raise capital to invest in various parcels of land.
Then farmers rent the land from the REIT and investors in the REIT receive periodic dividend payments.
By investing in a farmland REIT, investors take advantage of the consistently high returns that this asset has to offer. At the same time, they avoid the responsibilities that come along with owning and managing a farm.
The REIT itself takes care of 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. REITs trade on the same exchanges that stocks do, meaning you can buy them in exactly the same manner. The level of liquidity found in farmland REITs is drastically more than investors see in traditional farmland investments.
Within a couple of minutes, you can purchase a farmland REIT for under $10!
Additionally, with that $10 investment, you are diversifying across dozens of farms. If things go south at one of the farms owned by the REIT, it’s likely that the other farms will even out the returns. As a result, you’ll take advantage of the consistent returns of an asset class that has continued to outperform 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 choose to 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 make loans to farmers to expand their operations or purchase more land.
In general, equity REITs tend to be more volatile than debt REITs. This is for a number of reasons, one of which is that there is much more certainty with debt REIT returns.
With a debt REIT, it is likely that there is a definitive interest rate and payment schedule on the loan. This means that investors know when and how much they will be getting 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 known as hybrid REITs and generally benefit from 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. Once investors receive these dividends, they are taxed as ordinary income. This is different from dividends from stocks which are sometimes treated as capital gains.
When investors sell their shares in a REIT, they will receive capital gains treatment. If they held the REIT for over a year, it will be taxed at favorable long-term capital gains rates. If it was held for less than a year, it will be taxed as short-term capital gains which are the same as ordinary income.
1. LAND – Gladstone Land
Founded in 1997, Gladstone Land Corporation was the first farmland REIT to enter the scene. As of the middle of 2020, Gladstone has grown to a total portfolio of over $900 million.
Currently, Gladstone owns 115 farms totaling nearly 90,000 acres of land across the US. This includes land in 10 different states across the US with a 100% occupancy rate.
The farms owned by Gladstone are diversified in terms of location as well as by crop type. Across the 115 farms, 45 different types of crops are grown. This protects investors from price swings or diseases that may take place within individual crops.
Gladstone follows a traditional equity REIT model. By purchasing farmland from farmers or investors and renting it out to farmers, the REIT generates income for investors.
The goal of the company is to build the premier farmland real estate company focused on the ownership of high-quality farms. As an investor in the company, you could expect to have exposure to many high-quality farms in prime locations across the US.
Gladstone pays out monthly dividends to investors and has a current dividend yield of 3.76% This is comparable to other farmland investment options out there.
Over the last year, LAND has appreciated a respectable 22%. This has led to very respectable returns for LAND investors over the past year.
Since its inception, LAND is trading at roughly the same price. Over the past decade, there has been significant volatility in the stock, but dividends have remained consistent over time.
After bottoming out at the beginning of the pandemic, the stock has rallied significantly leading to the respectable gain for the current year.
For investors in search of an investment low in volatility, LAND will likely not meet their needs.
2. FPI – Farmland Partners
While Farmland Partners wasn’t the first farmland REIT, they are the largest. With assets of over $1.1 billion, they are over 20% larger than LAND.
FPI had their IPO in 2014 and now owns over 150,000 acres of land across the US. Most of the farms are located in the corn belt, southeast US, and California.
The company believes that the US is the world’s most appealing agriculture market to invest in. They see significant potential for rising productivity along with decreasing farmland mass and increasing demand for food as bullish indicators for farmland.
Low overhead costs of less than 1% of assets along with economies of scale have allowed FPI to grow very rapidly. While the company has focused on core investments in high-quality US farmland, they are also selectively considering special opportunities.
The goal of FPI is to work with farmers to lower their input costs and improve their farms. As a result, they are able to increase the profitability of both farmers and shareholders. FPI is capitalizing on the increasing global demand for food, feed, fiber, and fuel.
Over the past few years, FPI has put up very respectable returns. In 2018, the total return from the REIT was 12.2% and in 2019 that number rose to 29.6%.
However, since its inception, the REIT is down about 49%. This is not inclusive of dividends and when dividends are factored in, the returns have been positive for investors. Much of this fall in value is a result of a well-executed disinformation attack in mid-2018.
The dividend yield for FPI is currently 3.08%, this is par for the course on most farmland investments. Dividends are paid quarterly.
Currently, the stock is trading around $6.50 making it the most affordable way to get exposure to farmland. With a $6.50 investment, investors are getting diversification that would have required millions to achieve only a couple of decades ago.
Some may recognize the name Farmland Partners from a legal battle starting back in 2018. On July 11th, an anonymous group took short positions in FPI and initiated a disinformation attack to lower the stock price.
This attack was super effective and the FPI stock price ended up dropping nearly 40% in a single day and remained low for some time.
As a result, Farmland Partners is suing the anonymous group that performed the attack to recover damages done to the firm and shareholders.
Additionally, the attack resulted in a class-action lawsuit of some of the FPI shareholders against the firm. This lawsuit is based on the misinformation of the attack and Farmland Partners say it is meritless and frivolous.
To this day, FPI’s stock price has yet to fully recover from this attack. At the same time, they are currently still locked into both of these lawsuits.
Which REIT Is The Best?
Now that you’ve gotten a look into both of the farmland REITs currently on the market, which should you choose?
Each REIT is taking a slightly different investment strategy, so your choice will depend on your investment style and philosophies.
For investors wanting a larger exposure to row crops like corn and lower exposure to specialty crops and livestock, FPI will be the better option. With over 60% of their crops being row crops and a high concentration of farms in the corn belt, there is significant potential to take advantage of the US reliance on corn.
Additionally, the decrease in stock price may mean that the price of FPI does not fully reflect the value of the underlying land. If this is the case, it could be a good opportunity for investors to buy low and profit when the market realizes that the REIT is undervalued.
For investors in search of a more diversified crop yield and geographic spread, LAND could be a better option. With farms spread throughout the US and a greater concentration in specialty crops, this REIT presents the opportunity for investors to gain exposure to crops and locations.
LAND also has a significantly longer track record when compared to FPI and is not currently locked into any major legal battles. This could be appealing to investors in search of a more long-term investment.
In the end, both REITs share more similarities than differences and will allow investors to access farmland as an asset class for far cheaper than past generations were able to.