Farmland is an interesting asset class that has been gaining the attention of institutional buyers. The logic is pretty simple: No new farmland is being created. In fact, farmland is often repurposed for homes and other types of real estate development.
Real estate investment trust (REIT) Farmland Partners (FPI 0.44%) is looking to take advantage of this scarcity -- only this REIT's story isn't quite so simple.
The value of a farm
Farmland Partners estimates that there's about $2.5 trillion worth of farmland in the U.S., a valuation that's on par with the rental-apartment market. Of that amount, only about 1% of farmland is owned by institutions like pension funds, versus 5% for apartments. So there's material opportunity for growth here.
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There's also material appeal on a risk-adjusted basis. During the past 30 years, the standard deviation, a measure of volatility, for farmland is about 7.5%, compared to nearly 22% for the S&P 500 Index. This difference leads to a Sharpe ratio, a measure of risk-adjusted performance, of 1.2 for farmland versus 0.4 for the S&P 500 Index.
Notably, the average REIT has a Sharpe ratio of 0.4 as well, so this is really about the unique nature of farmland, not property in general. Basically, if you are looking for slow and steady growth, farmland fits the bill. And, even better, farmland returns don't correlate highly with other assets, meaning they can help with diversification.
On that basis, you'd think Farmland Partners would be a slam-dunk investment option. Unfortunately, it was hit by a short-selling scheme a few years ago that necessitated a dividend cut to ensure liquidity during a legal battle. By comparison, peer Gladstone Land has been able to continue growing and raising its dividend in the absence of legal distractions.
Farmland Partners' efforts to fight back was largely successful, getting a damaging report about the company retracted. Unfortunately, the company is still battling related shareholder-class action lawsuits, even though the short-seller claims were debunked. So this REIT is something of a turnaround play in that regard.
A big change
That said, Farmland Partners just made an acquisition that shifts the picture even more than the short-seller fiasco. In late 2021, Farmland Partners bought Murray Wise Associates. According to the news release announcing the deal, Murray Wise, the chief executive officer of Murray Wise Associates, founded Westchester Group, which is the largest institutional farmland asset manager. He started Murray Wise Associates as a spinoff of Westchester Group's brokerage, auction, and farm-management business when Westchester was acquired by TIAA in 2010.
Essentially, the goal here is for Farmland Partners to add an asset-management operation to its business. This pushes Farmland Partners beyond the typical REIT configuration, in which companies own properties and pass the income they generate from rents on to investors. Now, Farmland Partners will also help farmers buy and sell properties, create and manage institutional partnerships, and even directly manage farms on behalf of others, earning fees for the effort.
Farmland Partners is really looking to become a one-stop shop for farm investing, but that will make it a much more complicated company for investors to track and understand. If you like to keep things simple, this already complicated story just got even more complicated.
That said, for investors willing to watch their investments more closely, Farmland Partners' new business direction could be an interesting opportunity. Essentially, with one investment, you get broad exposure to farmland, including property ownership, property brokerage, and property management. That provides multiple avenues for growth in what is a large and underinvested asset class.
There's one caveat, however: The REIT is planning to focus on business growth and expects its dividend yield, now about 1.6%, to be fairly modest. So, income-focused investors probably won't like the stock.
So who should buy Farmland Partners?
At the end of the day, Farmland Partners' new business model will allow investors to access the farmland sector in a broad and diversified way. That's the good news. The bad news is that this change suggests that this already low-yielding REIT will remain that way even as it moves past its legal headwinds, limiting its appeal to growth-oriented investors and those looking for asset classes with low correlations to other investments.
If that sounds like you, then a deep dive could be appropriate. If you prefer simple investments, however, then Farmland Partners, despite operating in an interesting property niche, probably won't appeal to you.
