Farmland's Elephant Hunter

Mega-Landlord Voices Confidence in Land

Cash rents of $350 aren't hard to get in Illinois despite pressure on growers to economize, said Farmland Partners CEO Paul Pittman. (DTN photo by Pam Smith)

HADDONFIELD, N.J. (DTN) -- Farmland Partners CEO Paul Pittman admits his firm's purchase of 120 Illinois farms last week is "a very, very big deal," probably one of the largest single Grain Belt purchases in history. But while this mega-landlord expects the agriculture real estate investment trust he founded in 2014 to become a multi-billion dollar player one day, elephant hunting for farm real estate isn't easy to replicate.

"We think we can keep growing very substantially, and target doubling in acreage and value every year," Pittman told DTN in a wide-ranging phone interview from his Denver office. At the moment, his latest 22,300-acre shopping spree brings Farmland Partners' portfolio close to 100,000 acres, up from only 7,500 acres in April 2014. (See DTN's related story at http://goo.gl/…)

"I can't keep growing 10-fold per year forever," he admitted.

For one thing, institutional buyers like REITs -- along with pension funds, insurance companies and wealth management firms -- can't often find their preferred minimum-sized deals of $20 million, let alone the $197 million Pittman packaged to buy farms from Illinois businessman Gerald Forsythe. Last year, Pittman told DTN he scoured the country assembling smaller sales, even bidding at auctions that professionals normally shun for fear of overpaying.

BUILDING A LAND PORTFOLIO

Pittman's preferred operating method is to have landowners privately contact Farmland Partners (NYSE: FPI) and offer a three-year sale leaseback. 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 overextended and need to get their balance sheet back in order.

Critics contend institutional investors are often fair-weather landlords, buying on up-cycles and dumping agricultural portfolios when commodity prices reverse. That lack of patience can be a risk in areas where they are concentrating: Near the Nebraska-Kansas border, for example, at least five institutional owners compete in the same neighborhood. Land markets in parts of the Mississippi Delta and Texas have also become hotbeds of such ownership.

Pittman downplays that risk, saying his firm doesn't intend to "flip" farmland properties, instead adopting the patience and 50-year horizons that insurance companies like John Hancock, Metropolitan Life and even the Mormon Church integrate into their investment strategies.

Because of public concern over absentee ownership, states like Iowa, Kansas, Missouri, Wisconsin and others still outlaw institutional ownership of farmland. But advocates like Pittman argue ag REITs are in the public interest by making millionaire-priced assets affordable for small investors.

"No individual can afford to buy a New York skyscraper, but they can get exposure to that asset class by buying a REIT," Pittman said. With a modest, 80-acre farmland parcel now commanding $1 million and up in the Midwest, Pittman believes small investors will find REITs a better fit than direct ownership. Half of his REIT's investors are retail customers who buy shares through brokers to diversify their investments or retirement accounts, he said.

FARM ROOTS

The Farmland Partners' CEO is a down-to-earth Illinois native who studied agriculture at the University of Illinois then accumulated advanced degrees at Harvard and the University of Chicago. He speaks farmer lingo, but burnished his Wall Street credentials with stints as a senior investment banker for Merrill Lynch in London and a series of software firms.

Pittman sees farmland REITs as a way to reconnect the urban public with their farming roots. "The organic, grow local, heirloom version of agriculture isn't bad or inappropriate, but it's not really what feeds the U.S. population or the world," he said. "It's the medium and large-sized farmers in places like Iowa and Mississippi who feed the world, not [best-selling author] Michael Pollan's 'Omnivore's Dilemma.'"

FUTURE RISKS

REITs have been the darling of Wall Street in recent years, performing more like bonds than stocks. Over the past five years, they've averaged about 12% annual returns investing in real estate like shopping centers, hotels, apartments and office parks. However, their stock values tend to wither on rising interest rates and have fallen sharply on hints the Federal Reserve will hike interest rates later this year.

Perhaps the most serious threat for Farmland Partners is the risk that agriculture's cash rents could falter from their normal 4% to 6% annual returns -- or that overall farm real estate values collapse with farm incomes. Pittman scoffs at both scenarios.

A "minute" change in the Federal Reserve's short-term rates shouldn't affect the real estate market much, Pittman said. "We [in real estate] borrow on three- to five-year terms, sometimes 10," he said. "If the Fed raises rates a quarter of a percent on short-term loans, will values or rents collapse? No."

Pittman also doubts cash renters need the kind of rent relief many land-grant university economists believe is necessary for growers to break even in 2016, based on dire commodity price projections.

"It's not a horrendous environment in farm country. Prices are stunted but production is making up for that," he said. In eastern Colorado, dryland corn farms budgeted for 60-70 bpa yields but averaged 120-140 bpa in 2015. "They are just coming off the greatest year of their life," he said.

Rarified $500 rents are dead, but they weren't normal anyway, he said. "Growers will hold on to rented land at zero profit [for 2016] because three or four years ago they made $400/acre profits. That's not a mistake. Farmers know if they give up rental ground, they will never get it back. They know prices will recover, and when they do, they'll want that land to farm," he said.

In places like Illinois, Pittman said, "$350 cash rent is not hard to get [for 2016] and $400 rents are achievable. Farmers aren't bankrupting themselves at those rates."

Cropland rents track corn prices tightly, Pittman stressed. "They should have gone to $600/acre when corn peaked. The reason they didn't was nobody thought $6 corn was permanent. Nobody thinks $3.90 corn is either."

With news that China is adopting a "two-child" policy, Pittman can't believe food demand won't multiply, or U.S. farmland values won't appreciate over the next 10 years. Even if Brazil or other parts of the world add more cropland acres to feed the world, competitors can't match the U.S. for river and rail transport.

"You might be able to add acres in Timbuktu" but it's not the same as Illinois or Iowa, he reasons. "I guess you could call me a believer."

Marcia Taylor can be reached at marcia.taylor@dtn.com

Follow Marcia Taylor on Twitter @MarciaZTaylor

(AG/CZ)