There are very few things in life that are as important as eating, which is why real estate investment trust (REIT) Gladstone Land (Nasdaq: LAND) is happily buying farms. However, there are some notable risks to consider before you buy this stock. Here's why those risks could be well worth taking -- even for investors with a conservative bent.
1. A small fry
Gladstone Land has a market cap of just $350 million or so. In the REIT world that's a miniscule number. In fairness, the company was started, no pun intended, from the ground up in January 2013 with just 12 farms. That means it's only seven years old or so. But it has done a lot over that span, ending the third quarter with 127 farms in its portfolio. So while it's still small, it has been growing quickly.
Also important here is that the farm REIT niche is pretty small, too. Gladstone Land is, in fact, materially larger than what is likely its closest peer, Farmland Partners (NYSE: FPI). That REIT weighs in with a $230 million market cap. It's also worth highlighting that Farmland Partners cut its dividend 60% in 2019. Gladstone Land has steadily increased its monthly pay dividend since its IPO. Clearly, it's handling its growth in stride while still rewarding investors with a growing distribution along the way.
2. External management
That said, Gladstone Land isn't as small as it may at first seem because it's part of the Gladstone family. Gladstone is an asset-management company that oversees a number of different public entities. Although none of the companies Gladstone oversees is particularly large on their own, together they're worth north of a billion dollars. So there is more scale here than at first meets the eye, and that allows Gladstone Land to punch in a higher weight class.
That said, being externally managed, Gladstone Land does come with negatives. Conflicts of interest between this REIT and the other entities Gladstone controls are unlikely given that it's the only one that invests in farmland. However, key members of Gladstone Land's management team also hold positions at other Gladstone entities. And, more notable, the nature of the management contract is such that portfolio growth is rewarded. This means that there is a risk that Gladstone Land will expand its portfolio for the sole purpose of increasing the fees that it produces for its external manager. So far that doesn't appear to be the case, but it's something investors need to keep in mind.
3. Niche investment
Although already hinted at, investors need to understand that farmland isn't a huge investment category in the REIT space. There's really only two material options, Gladstone Land and Farmland Partners. There are a number of private players, so there is meaningful competition in the space. But this is far from the mainstream of the REIT universe.
This isn't inherently bad, but it does mean investors have to be prepared to pay a little more attention to what they own. Simply put, farms don't operate in the same way as other properties. If you step in here, you will need to get a deeper handle on how and why Gladstone Land does what it does.
For example, the REIT favors crops like vegetables, nuts, and fruits over grains. Why? The answer is that they tend to produce crops with less price volatility, generally produce higher rent rates, and are closer to urban populations (which translates into better redevelopment prospects). While you don't need to understand every individual farm investment, it is important to understand the approach and regularly make sure that Gladstone Land is still living up to its goals.
4. Mom and pop
Although there are a number of big players in the farm space, the $2.7 trillion U.S. farm sector is roughly 86% family owned. On the surface that's a huge opportunity, since Gladstone Land appears to have ample room to keep expanding its portfolio. However, individual owners may not be driven by the same rationality that drives a REIT. As such, the opportunity ahead may not be as big as it first appears or come as quickly as hoped. For example, Gladstone highlights that a large number of farm operators are in their late 50s. That still leaves another 15 plus years before retirement age. And a private farmer might feel inclined to leave a farm to his heirs, some of which might want to operate the farms and not sell them. If there's more than one decedent, meanwhile, a large farm might end up broken into pieces, only some of which end up being sold. The big takeaway here is that, because of the private nature of the ownership, buying farmland is probably more complex than it may seem at first.
5. Modest yield
The last issue is that Gladstone Land only offers investors a modest 3.7% dividend yield today. Moreover, dividend increases have been pretty small lately, with hikes of just 0.5% in 2019 and 2020. At this point, this is a long-term play with a tortoise-like dividend. But that makes some sense given the nature of the business. In fact, it's worth noting that the coronavirus has had little impact on Gladstone Land's lessees because they tend to sell products to grocery stores. The REIT is, effectively, collecting all of its rents with little problem. That's a huge statement about the strength of the portfolio, the vital nature of farms, and why investors might want to add a REIT like this to their portfolio.
Not for everyone
All in, Gladstone Land probably isn't a good fit for some investors. For example, if you're looking to maximize current income, then the yield will probably be too low for you. And if you're looking for swift dividend growth, then you'll want to look elsewhere. However, if you're trying to create a reliable core income portfolio that can help replace a paycheck, then it's worth a closer look. The yield from Gladstone Land's monthly pay dividend is materially higher than what you'd get from an S&P 500 Index fund. And the dividend is backed by properties that produce necessity items (food) that have proven they can withstand very material headwinds (the coronavirus pandemic). There are negatives that come with this REIT, such as external management, but for conservative investors there's probably a good risk/reward balance here.