There's a saying in real estate that they aren't making any more land, which is meant to suggest that buying property is a good thing. However, in the case of farmland, not only are they not making more of it, the acreage allotted to growing food has been shrinking for years relative to the ever-increasing number of humans in the world. So should you buy a real estate investment trust (REIT) that's focused on farms, like Farmland Partners (NYSE: FPI)? Well, the answer isn't as easy as you might hope.
A look at the business
Farmland Partners buys farms, as its name implies. It owns or manages over 160,000 acres of land across 16 states. It has more than 100 tenants across its portfolio. Roughly 70% of its property is dedicated to commodity crops like corn, wheat, and cotton. The rest of the portfolio is focused on specialty crops like fruits, vegetables, berries, and nuts.
The 70/30 mix is actually pretty important, because commodity crops face more competition than speciality crops. That largely impacts the farmer more than the landlord, but there are greater risks associated with row crops like corn and wheat that sell into a global market. Vegetables and berries are more perishable and, thus, tend to serve local regions and have less competition. They are, generally speaking, considered more consistent businesses. It's why Farmland Partners' main competitor, Gladstone Land, focuses more heavily on specialty crops than row crops.
That said, this isn't the only difference between these two farm-focused real estate investment trusts. Notably, Farmland Partners is internally managed while Gladstone Land is externally managed. Some investors avoid externally managed REITs because of the risk of conflicts of interest with regard to things like compensation. This is a notable point in Farmland Partners' favor, but there's a fly in the ointment here.
Investing in farmland involves a capital-appreciation component. The basic idea is that farms become more valuable over time as the population expands and there are more mouths to feed from the same amount (or less) of farmland. However, for investors, buying a REIT is also about income. In fact, the corporate structure is specifically designed to pass tax-advantaged income on to shareholders. Farmland Partners' yield is a scant 1.6% compared to 2.3% for Gladstone Land. The yield of the average REIT, using Vanguard Real Estate Index ETF, is around 2.3% as well. So Farmland Partners doesn't fare very well on the yield front.
Farmland Partners also cut its dividend in 2018, which is never a good thing. The roughly 60% decrease was pretty material, too. The logic given for the dividend reduction was that the board believed it could create more value by buying back stock than paying the dividend given a stock price decline that took place that year. The price decline, meanwhile, was related to a short seller that was putting out negative research on Farmland Partners. The REIT actually sued the short seller and eventually won its case. However, for an income-focused investor, a dividend cut is rarely a welcome event. And, notably, the dividend has remained stuck at $0.05 per share per quarter since the 2018 reduction. For comparison, Gladstone Land's dividend has been increased annually for eight consecutive years and didn't have to deal with a short-seller drama.
Farmland Partners' share count, meanwhile, is only down about 7% from where it was at the start of 2018 (and actually ticked higher in the first quarter of 2021). It's fair to wonder if investors would have been better off with a higher dividend (which investors could have chosen to reinvest if they wanted). Only if the first quarter is any indication, dividend coverage isn't great here. Adjusted funds from operations (FFO) came in at $0.03 per share if you exclude litigation costs. That's not enough to cover the $0.05 dividend. To be fair, farmland is a bit different than other property types, with rents often paid in a lump sum rather than monthly. In the fourth quarter of 2020, adjusted FFO was $0.16 per share. Still, using a little back-of-the-envelope math and extrapolating the last two quarters to the full year, it looks like full-year adjusted FFO probably wouldn't be enough to cover the previous $0.1275 per share per quarter dividend that was being paid prior to the cut.
Given the modest yield on offer from Farmland Partners relative to the average REIT and Gladstone Land, most investors will probably be better served looking elsewhere. To be fair, some of Farmland Partners' story is complicated by the short-seller event, which has only just recently been resolved, but that doesn't change the fact that Farmland Partners is heavily focused on commodity crops or that the 2018 dividend cut appears to have been a necessary change. If Farmland Partners gets the dividend growing again, it might be worth a revisit. However, until that point, its business model really hasn't lived up to other real estate options that investors can easily access.