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Throughout the ups and downs of the economy, farmland has consistently ranked as one of the most stable asset classes.
For investors looking to add a hedge against inflation and diversify out of stocks, farmland is an attractive choice.
However, it's historically been difficult to invest in farmland as a new investor. In the past, 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 is 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. Let's jump right in!
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What Is A Farmland REIT?
A REIT or “real estate investment trust” is a company created for the sole purpose of holding 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 the consistent returns that this asset class has to offer. At the same time, they avoid the responsibilities that come along with owning and managing a farm. However, returns are often lowest for this type of farmland investment.
The REIT itself takes care of the management and logistics while the investors sit back and receive their dividends. It is the most passive form of farmland investment.
What makes REITs particularly attractive to investors is how easily they can be bought and sold. This is referred to as liquidity. 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 higher than investors see in traditional farmland investments. However, that liquidity can and will work against you in a market sell off. REITs are almost directly 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 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 reap the benefits of both 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.
Best Farmland REITs
With all of that out of the way, let's now cover the best REITs for investing in farmland. Unfortunately, the options are quite 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. As of the later part of 2021, Gladstone has grown to a total market cap of just over $800 million. As of January 2023, the total market cap has fallen to $675 million.
Currently, Gladstone owns 131 farms totaling nearly 113,000 acres of land across the US in 15 different states.
The farms owned by Gladstone are diversified in terms of location as well as by crop type. Across the 131 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. It generates income for investors via purchasing farmland from farmers or investors and renting it out to farmers.
Beyond just farmland, Gladstone acquires properties related to farming, such as cooling facilities, processing buildings, packaging facilities and distribution centers.
Gladstone historically pays monthly dividends to shareholders and has paid 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 2.78% This is comparable to other farmland investment options out there.
Over the last 5 years, LAND stock has appreciated a massive 49%. This has led to very respectable returns for LAND investors over the past few years.
In the last few months, the stock has experienced a downturn, which is in line with the total stock market.
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 in recent months, they have just overtaken LAND in terms of total market cap. With a market cap of $713 million, they are a bit larger than LAND.
FPI had their IPO in 2014 and now owns over 160,000 acres of land across 17 different states.
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.
Across all of their different farms, there are over 25 different crop types grown and over 100 tenants. This type of diversification is not something you would have with an individual investment directly into a single farm. One of the benefits of farmland REITs is being well diversified across many different plots.
The dividend yield for FPI is currently 1.75%, this is par for the course on most farmland investments. Dividends are paid quarterly.
After the IPO, this stock went down for a few years going from around $13 to $5. Now, it is back in the range of $13 per share.
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 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.
Which Is 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 could 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.
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. Additionally, it is not currently locked into any major legal battles. This could be appealing to investors in search of a more long-term investment.
Final Thoughts: Best Farmland REITs
REITs provide investors an opportunity to get started with farmland without the traditional high cost of capital and time investment. Though it is important to recognize that while you gain liquidity and ease of investing, you do lose some of the consistency of farmland.
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.
Keep in mind, a REIT may not be the best option for you. You may want to consider a direct farmland investment platform if you have a sizable amount to invest.