I have been trying to find a decent farmland REIT for months as well - it’s not easy!
Valuing farmland is not an easy business. It largely depends on individual estate. The most basic measure of value is comparing the farm to commodity prices. If you are investing in a farm which sews wheat, you should compare the price of the farm to global wheat prices.
I could not find a passive stock to track the performance of farmland in US. Also, I would avoid any such instrument in the future - the sector is young and all of the farmland REITs trading on US stock exchanges are in my opinion poor investments. I almost think it would be safer to pool together capital from some friends and invest in farmland yourselves with a debt facility from a willing bank - as long as the gearing is sensible.
There are currently two big Farmland REITs in the US: Gladstone Land and Farmland Partners
In my opinion, avoid them both at all costs. Farmland Partners has many warning signs. However, its the equivalent Gladstone Land that has lights which aren’t quite flashing red, but are deeply concerning…
When I started researching Gladstone Land, it seemed like a very suitable option for an invesetment. In an article published on Seeking Alpha, the writer described the company as the ‘snail’ in relation to Farmland Partner and not the ‘tortoise’. This seemed to be in the case, until I saw Gladstone’s terrible cash flows statements and tendency towards leverage. Alarm bell number one. Then I read up on the founder of Gladstone. In an interview, he said that he wanted to be incredibly rich. Alarm bell two. Then I noticed that the founder operated other property ventures under the Gladstone umbrella and that Gladstone Land was just one part of the empire - not his sole focus. Three. After than, I noticed about a debt irregularity that the founder had in one of his companies. He had borrowed money from one of his companies and had done something strange with it I can’t remember this irregularity exactly, but I can unearth it if necessary. It wasn’t a smoking gun, but it definitely changed my opinion of Gladstone as the so-called ‘snail’.
I genuinely wanted to invest in Gladstone. It was investing in exactly the sort of crops I want exposure to. But, I could not see a margin of safety with the investment. There were just too many warnings signs.
I did not give up the fight though.
I began looking to other countries with very strong agri-business sectors and this lead me to looking for a farmland REIT in Australia registered on the ASX - Rural Funds Management:
RFM was exactly the opposite to all the US farmlands I had unearthed. From the beginning, there were signs that RFM was an investment very worthy of attention.
Company founder David Bryant created the first farmland REIT in 90s. He had sold the company in around 2007 and bought back the company at a fraction of the price in 2008-9.
RFM had good things going for it:
• Conscious of debt, raising equity in recent months to clean up their loan to book ratios (currently about 30%-40%)
• Stable cash flows
• Consistent earnings growth since going public
• Management Team with experience in farmland funds (again, they practically invented them)
• Management with a significant interested in the business (insider ownership)
• Insider ownership has increased in recent months
• Management fee not extortionate either (1%-1.5%. It certainly didn’t give you the impression that the founders were charging a 2% to scrape the top off your assets!)
The icing on the cake, was that the secretary I emailed gushed about the founder David Bryant saying that Bryant had a reputation for integrity and that RFM was a brilliant company. What more could you ask for! I didn’t ask her a question to prompt this, she just said it!
My only concern about investing in RFM is not the company, but about the Australian economy. I know I can get in trouble for macro forecasting, but there is a very strong possibility that China is currently one of the biggest credit bubbles of all time. Australia has significant exposure to China. My main fear is that a collapse of the Chinese economy could push Aussie property prices and farm prices downwards.
I want to wait for China and Australia’s possible credit bubble to play out before making my move!