FPI - Billionaire Bill Gates Really Likes Farmland

July, 08 2023 08:05 AM Farmland Partners Inc.

2023-07-08 08:05:00 ET

Summary

Billionaire Bill Gates has bought a lot of farmland in recent years.
He explained why he thinks that farmland is a good investment.
We look at how you can follow his footsteps and invest in farmland.

Recently, I was listening to a Reddit " Ask Me Anything " session with Microsoft Corporation ( MSFT ) founder Bill Gates, and I was surprised to hear him talk about his investments in farmland.

He explained that he now owns about 270,000 acres of farmland, spread across 18 different states, making him the largest landowner in America. It represents about 1/4000 of all farmland in the U.S. - worth many billions of dollars.

It begs the question:

Why would he invest so heavily in farmland?

After all, Bill Gates would probably be in a better position to invest in exciting AI ventures than farmland, which is rather boring in comparison.

Here is his response:

"I own less than 1/4000 of the farmland in the U.S. I have invested in these farms to make them more productive and create more jobs. There isn't some grand scheme involved - in fact, all these decisions are made by a professional investment team."

Farmland Partners

In other words, he is buying farmland because he simply thinks that it is a good investment. It is not more complex than that.

And Bill Gates has a point here.

If you look at the historic performance, you will find that farmland has outperformed stocks ( SPY ), bonds ( BDN ), and gold ( GLD ), all while paying higher income and being less volatile:

FarmTogether

This then leads us to the next question:

What makes farmland such a good investment?

This is a topic that I like discussing because I myself invest a lot in farmland. For background, I used to work in private equity real estate and we would often invest in land. Later on, I became the advisor to a company called FarmTogether, which has since then become the leading crowdfunding platform for farmland investing, amassing nearly $200 million of assets under management. I also actively follow a number of publicly listed farmland investment opportunities ranging from real estate investment trusts, or REITs, in the U.S. ( FPI ; LAND ) to farmland holding companies in the Baltics (INL1N) and Australia ( RFNDF ).

In what follows, I will give you 5 reasons why farmland can be a great investment, and finally, I will also discuss how individual investors can gain exposure to it.

Reason #1: Ability to add value

Let's start with this reason because Bill Gates mentioned it in his response. He said that he has invested billions in farms to "make it more productive."

What this essentially means is that you make improvements to a property to create value. As an example, at FarmTogether, we often buy discounted farmland with old trees or bushes and we then replant them to increase the yield and productivity, creating value in the process. It leads to a few years of missed income, but it creates so much value that it is often worth it.

It is the equivalent of buying a house and fixing it up to increase its rent and grow its value. There are many such opportunities in farmland, allowing investors to force value creation. You are not just waiting and hoping for the market to reward you.

Reason #2: Better use conversions

This is something that we did a lot in my private equity days. We would buy a piece of land in an area of rapid growth and we would then sit on it, earn a bit of income, and wait patiently until there would be an opportunity to flip it to a developer or develop it ourselves.

Back in 2016, I recall that we had bought a big plot of land in Princeton, Texas, which is 40 minutes north of Dallas. We already knew back then that North Dallas was growing rapidly and could predict that this piece of farmland would eventually be developed into single-family housing. That's precisely what happened, and investors earned a nice return from this investment.

I don't know how much of that Bill Gates is doing, but all farmland investments benefit from better-use conversions, directly or indirectly. Even if it doesn't directly impact your own property, it will benefit you as it decreases the supply of farmland, increasing the value of the remaining supply.

Reason #3: High yield relative to risk

Farmland does not offer the highest yield that you could get in the investment market. As an example, you could today invest in a business development company like Owl Rock Capital ( ORCC ) and earn a 10% dividend yield.

You are not going to get nearly as much when investing in farmland.

However, the yield still remains very high relative to the risk of the investment.

High-quality row crop farmland won't get you much more than 3-4%, and permanent crop farmland will typically yield closer to 6%.

But importantly, this is a safe investment that's recession-resistant and inflation-proof. We will always need food, and as long as you diversify by crop type and geography, your farmland will likely also grow in value over time.

This brings us to the next point:

Reason #4: Predictable growth

Most equity investments have a significant degree of unpredictability because their value is largely a function of how well the economy is doing, how their management will execute the strategy, and how their competitors will perform.

But farmland is a lot more predictable.

It is much more about demographics than the broader economy. People will still need to eat whether the economy is growing by 2% or contracting by 2%.

And the number of people on this planet keeps rising at a rapid pace. It is estimated that by 2050, we will reach nearly 10 billion people and all these people will need to be fed.

Moreover, as increasingly many people move into the middle class, the consumption of food grows even further.

Meanwhile, the supply of farmland is still limited and even decreasing in many cases due to better-use conversions and climate change.

As a result, farmland is affected by a persistent market imbalance with growing demand and declining supply - which has naturally resulted in growing values in the long run.

This brings us to our next point:

Reason #5: Diversification

Because farmland is such a unique asset class, it also provides significant diversification benefits.

Its value, yield, and productivity are not a function of demographics and this explains why farmland has historically been exceptionally resilient during times of crises like 2000 and 2008. Its value actually kept on rising during the great financial crisis!

This is likely one of the main reasons why billionaires like Bill Gates invest heavily in Farmland. They don't want to have all their eggs in tech stocks/businesses, which are comparatively risky, so they balance this exposure with a safe asset class like farmland.

I think that this alone makes farmland a worthwhile investment in today's uncertain world. It serves as an "insurance" against black swans in my portfolio.

How can you invest in farmland?

You really have three main options and each has unique pros and cons:

Option #1: you could buy farmland directly yourself

This could make sense if you have the skill set and interest to do so.

It could also yield superior returns as you skip management fees.

But on the flip side, you will risk overpaying because you likely aren't an expert and you will lack diversification unless you have millions to invest.

For this reason, I think that this is the worst option for 99% of investors.

Option #2: you could buy shares of a farmland REIT

This option makes a lot more sense for most investors. You can today gain exposure to a portfolio of farmland by buying shares of a publicly listed REIT.

Unfortunately, there are only about 10 of them worldwide:

Gladstone Land ((LAND))
Farmland Partners ((FPI))
Alico ( ALCO )
Rural Funds Group ((RFNDF))
INVL Baltic Farmland (INL1L)
Etc.

(Let me know if you know others in the comment section below!)

I personally own a position in Farmland Partners ((FPI)). I recently met its new CEO at the NAREIT Conference in NYC and got the chance to sit down with him for an interview , which is available at High Yield Landlord. I like it because it allows me to invest in a diversified portfolio of high-quality farmland and I think that it is discounted by about 20%.

What's the downside then?

Since it is traded on the stock market, it can be quite volatile and this negates the stability and diversification benefits of farmland. Moreover, you should note that FPI also has a brokerage and asset management business and therefore, this is not a pure-play farmland investment. Finally, they also use quite a bit of leverage, which increases risks. Therefore, if you are looking for a "safe" farmland investment, this probably isn't it.

Option #3: you could invest in farmland via a crowdfunding platform

There are today quite a few farmland crowdfunding platforms. The main ones are FarmTogether, AcreTrader, and FarmFundr, and I think that they are all reasonably good.

The advantages here are that you get to invest smaller amounts in each deal and can build a well-diversified portfolio. Moreover, these are cherry-picked deals that typically have a value-add component to earn above-average returns and higher yields. Finally, you have professionals that handle it all for you, making it a passive investment.

The downside is that you will pay fees to the managers. The fees are typically quite reasonable and well worth it in my opinion, but it is something to monitor. Moreover, the investment will be illiquid and, therefore, this wouldn't be suitable for you unless you have a 10-year investment horizon. Here is an example: