Most investors dream of finding that one grand-slam investment that turns a small investment into a million-dollar payday in a relatively short period. While those dreams have come true for some, unfortunately, most of the rest of us will need to be patient. That patience often pays off because long-term investing can produce some enriching returns when time and compound interest work together.
For example, a relatively meager $10,000 investment in an S&P 500 (INDEXSP: INX) index fund has historically compounded its way to $1 million in about 46 years (assuming it generates 10% annual total returns). Boost the returns, and an investment can mint millionaires even faster.
With that long-term mindset in view, here's a closer look at the millionaire-making potential of specialty real estate investment trust (REIT) Gladstone Land (NASDAQ: LAND).
True organic growth
Gladstone Land focuses on owning farmland and related agricultural properties, like cold-storage facilities. Farmland has been an excellent investment class over the years. From 1992 through 2018, it has produced an average total return of around 10% through a combination of land-value appreciation and income from leases or crop sales. Even better, it hasn't had a down year during that time frame and has produced those strong returns with less volatility than other investment options like stocks.
Gladstone Land has delivered similarly solid results since its initial public offering in January of 2013, generating a 9.4% total return. However, it has underperformed the broader market, which has produced a scorching 15.5% total return during that time frame.
Can Gladstone Land grow enough to enrich investors?
Farmland is a very long-term investment, often taking a decade or more to play out. Because of that, Gladstone's farms still have lots of room to organically grow their value.
The company usually signs long-term triple net leases (typically five to 10+ years) with farmers that contain annual rent escalators that generally keep pace with inflation. As those leases expire, the company can sign new ones, often at higher rates given the steady appreciation of farmland values, especially for high-quality farms, which is its investment focus. Meanwhile, some of its contracts give it a cut of the farm's gross revenues, giving it upside in a good year. As noted earlier, farmland has historically produced a 10% annual return over the past few decades, suggesting a similar value proposition from Gladstone Land's existing farm portfolio.
Meanwhile, Gladstone can complement that organic growth by acquiring additional farmland and agricultural assets. The company has steadily expanded its portfolio over the years via acquisition, growing it to 141 farms with 104,000 acres across 13 states worth about $1.2 billion. It most recently bought an olive orchard in California for $37.8 million, blueberry cooling and storage facilities In California, and 228 acres of farmland in Maryland leased to a sod and vegetable grower.
Gladstone Land sees a massive market opportunity to acquire farms. There's an estimated $2.7 trillion of farmland in the U.S., 86% owned by family farmers. Even if it only buys top-tier farm properties in its two primary focus groups, it has lots of room to grow. It estimates that there are 3,000 top-tier annual fresh produce farms valued at $15 billion and 6,625 top-tier permanent crop farms worth $33.1 billion. Meanwhile, there are plenty of agricultural-related properties, like cold-storage facilities, to acquire if it wanted to continue moving down the farming value chain. Finally, if it ran out of opportunities in those primary and secondary focus areas, a tertiary option is to start gobbling up some of the 22,580 top-tier grain and other crop farms in the country valued at $112.9 billion.
As Gladstone Land continues expanding its portfolio, it will gain greater scale advantages. That should help reduce its corporate costs and boost its overall investment returns.
Add it all up, and Gladstone Land has the potential of producing double-digit total annual returns over the long term.
You don't have to bet the farm to win
Gladstone Land isn't going to sprout up overnight and produce game-changing returns. That's not farmland's game; it creates wealth slowly with less volatility.
However, it should steadily grow shareholder value organically as its farms appreciate and it continues expanding its portfolio via acquisition, supporting steady dividend growth. Because of that, it should enrich investors over the long term. That makes it a great compliment to a portfolio filled with lottery ticket-type investments that could pay off handsomely if they hit it big.