Ag Real Estate Spree Continues

Merger Creates Wall Street's Largest Farmland REIT

Farmland Partners CEO Paul Pittman continues on an acquisition spree that's topped $500 million worth of farm real estate in the past year. (DTN photo by Elizabeth Williams)

HADDONFIELD, N.J. (DTN) -- Farmland Partners Inc. CEO Paul Pittman created shockwaves with the purchase of 22,300 acres of Illinois farmland earlier this year, the state's largest single purchase ever. The institutional investor's spree in U.S. farmland continued Monday, as Pittman's company announced it was merging rival American Farmland Company (NYSE: AFCO) into its cropland kingdom.

While still modest in size for a New York Stock Exchange-traded REIT, the merger will create the largest U.S. farmland real estate investment trust (REIT) "by miles," Pittman told DTN in an interview.

When the deal is completed later this year, the combined entity will own $850 million of prime U.S. farmland assets spanning 133,000 acres spread over 16 states and 25 major crop types. Gladstone Land (Nasdaq: LAND), with a value of about $350 million, is next in line, but both REITs are dwarfed by mutual fund companies like TIAA-CREF and insurance companies like Prudential who manage billions of dollars of U.S. farmland for investors.

Farmland Partners' latest move represents $500 million in farm real estate acquisitions in the past 12 months. The firm expects to continue its rapid pace of growth, in part because it needs a multi-billion scale to carry the overhead of a publicly-traded firm. It also has been successful in attracting farmland owners who are willing to trade their land for stock in the company, receiving tax benefits and diversifying their geography in the process. Such trades mean cash doesn't need to trade hands.

Outside of agriculture, REITs have become a fixture of real estate investing during the past 20 years. It's a way to bundle trillions of dollars in apartment complexes, shopping centers and commercial real estate and pay public investors a share of rents. By law, REITs must distribute 90% of their earnings to shareholders. On average, that's meant dividends of about 4% lately, not counting appreciation in the overall stocks. However, as the Federal Reserve raises interest rates, many market analysts expect REITs' attraction to slide.

Agriculture's economic slump also poses a threat to farmland REITs, as some tenants will have significantly reduced resources to pay rents after three years of losses. According to USDA, corn revenues have plunged 38% since 2012.

However, Pittman thinks such setbacks are temporary and remains bullish on U.S. farmland long term. "Global food demand is in scarcity," he said. "These low prices are laying the foundation of [higher] demand every day. Demand once there, doesn't go away; just look at what's happening to soybean exports and corn exports. The markets are working... We won't have perfect weather every year. Sometime, whether it's next year or five years from now, we'll be talking about how did the corn price get so high again?"

Investor interest in farmland soared during grain market highs over the past decade. But American Farmland's stock has been undervalued since its public launch, trading about $6 per share when its underlying assets were worth $9 per share, Pittman said. He said the firm's assets were sound, but the company was too small and carried too much overhead.

Until now, Farmland Partners (NYSE: FPI) concentrated on acquiring row-crop farms that raised corn, soybeans, wheat and cotton, largely in the Midwest, Plains and Delta. American Farmland's smaller portfolio specialized in permanent crops such as almonds and oranges. The combined entity will consist of approximately 75% row-crop farmland and 25% specialty crops by value. Farmland Partners expects to consolidate American Farmland's operations into its existing Denver-based headquarters and realize significant cost savings by trimming administrative and overhead costs.

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