Gladstone Land (NASDAQ: LAND) has grown a lot over the last three years. The farmland-focused specialty REIT has expanded its acreage holdings from around 60,000 in 2017 to nearly 90,000 this year. Meanwhile, its lease revenue, cash flow from operations, adjusted FFO, and dividends have also grown.
Those upward trends appear poised to continue over the next three years. Here's a look at what seems to be ahead for the farmland-focused real estate investment trust (REIT).
Where Gladstone Land is today
Gladstone Land's portfolio consists of 115 farms with 89,000 acres spread across 10 different states, currently worth about $912 million. The company leases this land to farmers who primarily grow annual row crops that they plant and harvest annually. It also owns farms that grow permanent crops like fruit orchards or groves that get planted once every 10 to 20 years but bring annual harvests.
The company leases its farms to tenants under long-term contracts (typically five to 10 or more years) with annual escalations. These contracts are either for a fixed cash rent (triple net leases) or that plus a percentage of the farm's gross revenue (participating leases). Overall, the company primarily utilizes triple net leases, which provide it with predictable cash flow to support its 3.4%-yielding monthly dividend.
Where Gladstone Land seems headed
Gladstone Land has a focused acquisition strategy. It targets farms with high-value cropland (primarily fresh fruit and vegetable row crops) and on-site water sources. It has invested $230 million to acquire 17 farms over the past year.
That trend of steadily snapping up high-quality row crop farms should continue over the next three years. It already owns properties in 10 states and likely will continue buying farms in those areas. However, the company's geographic focus is much broader as it includes another dozen states. Because of that, it wouldn't be surprising to see it expand into those other areas over the next few years.
The primary acquisition focus in both current and new states is farms focused on fresh produce. The company estimates that there are 3,000 top-tier farms in this category, which it believes is a $15 billion market opportunity.
Meanwhile, there's also plenty of acquisition potential in its secondary focus of permanent crops. Gladstone Land estimates that there are 6,625 top-tier farms focused on bushes, orchards, trees, and vines that produce fruits and nuts, which is an even larger opportunity set at $33.1 billion.
Because there's so much growth potential in those two farm types, Gladstone Land doesn't have to deviate from its current strategy to keep growing. However, it has identified two other farmland-related market opportunities that it could pursue if the right deal came along.
First, the company could acquire farms focused on commodity grains and other crops (i.e., corn, cotton, wheat, and soybeans). It estimates that there are 22,580 top-tier farms focused on these short-lived, annual row crops, representing a $112.9 billion market opportunity. One reason it doesn't currently focus on these farms is that they lease at lower rates than those focused on fresh produce even though they're higher risk commodity crops. Because of that, cap rates for commodity crop farms are usually much lower than those focused on fresh produce. However, if it started finding great deals on high-quality commodity farms, it could add some to its portfolio.
Another potential future investment opportunity for the company is to acquire farm-related properties, such as cooling facilities, processing buildings, packaging facilities, and distribution centers. If it found the right deals, especially for a property that serves one of its existing farms, it could make sense to add these types of buildings to its portfolio.
With such a massive market opportunity, Gladstone Land should have no problem expanding its farming portfolio over the next few years. It has multiple funding sources to pay for future additions, including excess cash after paying its dividend, stock sales, and more debt. Future acquisitions should grow its FFO, allowing it to keep increasing its dividend. The company has already given its investors a raise 19 times in the last 22 quarters, boosting the payout by 49.3% overall. It aims to keep that trend going, targeting dividend growth "at a rate that outpaces inflation," according to comments by CFO Lewis Parrish on the second-quarter conference call.
Expect steady expansion over the next three years
Gladstone Land has a well-defined growth strategy. The company primarily acquires farms that produce fresh vegetables, which it leases to tenants under long-term net lease contracts. This strategy enables it to steadily grow its cash flow and dividend. With a massive market set and lots of financing options, it seems likely that Gladstone Land will have an even bigger portfolio and dividend three years down the road.