Minding Ag's Business

Farmland Partners CEO Paul Pittman doesn't want to perpetuate the image of a big, bad institutional investor. He knows insurance companies who promised 50-year horizons then ditched their farm portfolios during the 1980s credit crisis. Other New York investors tend to flip their properties in seven to 10 years or less. But Pittman says his agricultural real estate investment trust (REIT) plans to invest in farmland for the long haul, rewarding investors largely in rental income not capital gains.

"We're permanent, we're stable and we want to bring investment capital into U.S. agriculture," Pittman told me in a phone interview last week. In fact, he added, "Farmers who find themselves in a little financial difficulty the next few years will look at us as their friend."

The farm community has mixed opinions about outsider interest in farm ownership. Some states even maintain anti-corporate farm ownership laws on the books, although few have enforced those provisions since a Nebraska Supreme Court ruled its version unconstitutional almost a decade ago. On the other hand, fast-growing farmers like to partner with REITs as a way to expand their operations on someone else's dime. They see it as a way to lock in rental land.

No matter what your attitude, ag REITs definitely are the new buyers on the block, unlocking potentially billions of dollars of cash to the rural real estate market as I reported several weeks ago (see "Stock Markets Open Doors to Land Pools" http://goo.gl/…).

After the run up in commodity prices from 2006-2012, "there's a whole wave of money from strange places headed to agriculture, including outside investors," says David Freshwater, a University of Kentucky ag economist. He counts at least three REITs (or closely held partnerships operating like REITs) which have been recent buyers in western Kentucky. Farmers along the Colorado-Nebraska border also report a flurry of institutional investor activity in their region.

Farmland Partners (NYSE: FPI) launched its initial public offering in April raising $53 million, seeded with the $100 million of farm real estate Pittman has been accumulating since 1996. It was the first REIT to specialize in row-crop real estate. By mid-year, FPI owned 41 farms with 23,630 acres in Illinois, Nebraska and Colorado, along with three grain storage facilities. It had five farms under contract in Arkansas, Louisiana and Nebraska totaling another 4,075 acres.

With an initial $20 million financing package arranged by Farmer Mac, the REIT expects to own at least 40,000 crop acres by year-end, most with 50% debt loads. Unlike big institutions that seek $10 million deals and up, FLP has purchased properties worth anywhere from $500,000 to $24 million.

Ultimately, Pittman thinks FPI could be a multi-billion dollar fund, vying with a half dozen or more similar sized competitors in five or 10 years.

"Some $30 billion of farmland trades hands each year," says Pittman. "This (ag REITs) could be a very big industry."

Lately FLP has been paying dividends of about 3.7% to 3.8%. "In a world where passbook savings pays close to zero, a farmland return of 4% is a good return," Pittman says. "Especially because farmland is an incredibly low-risk proposition."

Critics have warned that the severe drop in commodity prices since 2012 will soon overflow into land markets, particularly if it lasts more than a year. But Pittman is more optimistic.

"The sky isn't falling on land values," he says, noting the abnormal gains the last five years were the best appreciation since the 1970s, not a permanent fixture. Today's land values aren't based on current prices, but expectations of commodity prices over the next three to five years, he argues. What's more, he does not expect to lower cash rents on their properties in 2015.

"It's still worth investing because global food demand will be much higher in the future. .. Short of a global pandemic, it's hard to figure out how farmland is not worth more in 5, 10 or 15 year," he says. "Does anyone think we won't need more corn in the future?"

Still, prime Corn Belt land that runs $12,000 to $14,000 makes it hard for an investor to earn a decent return. Lately Pittman has been turning his attention to the Delta, southeastern U.S. and High Plains. There it's easier to generate long-term returns of 4% to 6% on cash rent, he says.

Occasionally the fund will participate in land auctions, but its preferred arrangement is a sale leaseback with a landowner who calls FPI. The fund normally offers three-year leases with a right of first refusal if sold. The owner has the benefit of turning an asset into something more liquid, yet temporarily retaining the right to farm it. That can appeal to those nearing retirement and those growers who are over extended and need to get their balance sheet back in order, he says.

Given the prospect of big crop operating losses in 2014 and 2015, Pittman's real estate trust--along with scores of other institutional investors--could be getting quite a few SOS calls from farm operator-owners this winter. REITs might just be the bounce that keeps farmland from bottoming.

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