Agriculture and farmland are the backbone of our country, producing valuable food and grain that is used to not just feed our country but create health, home, and food products that we know and love. Historically this real estate asset class has performed well, showing strong resilience in times of economic hardship, and investors have started to take notice of the growing demand and opportunity. But is agriculture real estate investment trust (REIT) Farmland Partners (NYSE: FPI) the best way to participate in this space? Let's take a look to find out.
What Farmland Partners does
Farmland Partners is a unique REIT because it's a hybrid of both an equity REIT and a mortgage REIT that owns and leases farmland while also providing mortgage loans to farmers. With that being said, the majority of their portfolio is on the equity side of things, owning approximately 156,500 acres across 16 states, primarily in popular agricultural states like Alabama, California, Florida, Georgia, and Illinois, to name a few.
Crop diversity and location diversity are important when investing in farmland and agriculture. Having a variety of crops in various locations reduces the risk of crop loss from flooding, draughts, fires, or disease. Farmland Partners works with 26 crop varieties including wine, nuts, and non-fruit trees, although the bulk of their investments are in row crops such as corn, soybeans, rice, and cotton.
A rough few years
Agriculture and farmland is one of the least impacted asset classes from the pandemic. FPI's production and distribution was affected initially, but the interruptions were temporary with long-term outlook remaining positive.
Farmland Partners has recorded losses for the past three years, although they are making slow year-over-year growth with increases in operating revenues, adjusted EBITDA, and adjusted funds from operation (AFFOs). Their current AFFO is -$0.01, up $0.02 from the same quarter a year prior. In the second quarter of 2020, FPI completed three new acquisitions in the Corn Belt and High Plains, adding $8.7 million worth of new farmland to their portfolio.
Additionally, the company is currently in litigation over a "short and distort" attack made by a writer from Seeking Alpha in July of 2018 which resulted in a 40% decrease in stock value in one day. The impact of the case, including whether the case will be overturned or modified on appeal, is very much unknown, but Farmland Partners is doing everything in their power to pursue and receive retribution for damages caused to the company and shareholders, which could pay off in the long run for those invested.
A recent statement made by the company declared a reduction in dividends starting in July 2020 from $0.05 to $0.3750, pushing their already modest 2% to 3% returns down even further but providing a more sustainable cover ratio from their AFFO. Their second quarter 2020 results will be posted on August 5 and should provide more insight into their current financial state.
The bottom line
While agriculture and farmland is a growing industry and FPI has plenty of room to grow with it, it isn't without risk. I personally would hold off buying this stock until the new release is made or more information is provided on their plan to increase income over the next few years. This is a growth stock, not one you invest in now for the dividend return, but without further information as to how they plan to grow and recover and increase income in the coming years, I'd look elsewhere.