FPI - Farmland Partners: Should You Consider U.S. Farmland Against The Current Chaos?

2023-05-05 12:06:15 ET

Summary

• Farmland Partners offers unique portfolio-level diversification from prime US farmland.
• The internally managed equity REIT currently offers a 2.27% forward dividend yield.
• Fiscal 2023 first-quarter earnings saw revenue decline by just under 10% from its year-ago comp, with AFFO falling by around 25%.

Murphy's law is an adage that states anything that can go wrong will go wrong at the worst possible time. It feels like that now. As a fear-induced banking crisis gets combined with a US debt ceiling impasse, elevated inflation, record high Fed funds rate, strikes, and Russia's war on Ukraine to place the US stock market under the specter of total discombobulation. Most REITs have pulled back markedly, with Denver-based Farmland Partners ( FPI ) down around 34% over the last year.

Nearly one-third of US farmland is owned by non-operator landlords, and Farmland Partners along with Gladstone Land ( LAND ) form the only two publicly listed equity REITs focused on the unique asset class. Why is farmland a good investment? It provides unique income portfolio diversification and has historically produced stable inflation-beating returns. Farmland Partners focuses on prime farmland, which carries less risk and more upside. This is essentially farmland with a greater-than-average soil quality index, optimal water availability, and close proximity to points of demand or rail infrastructure.

Farmland Partners last declared a quarterly cash dividend of $0.06 per share , in line with its prior payment and for a 2.27% forward yield. The yield has been moving upwards throughout 2022 on the back of stock price weakness but still sits far below its pandemic-era highs. Bears, which form the 3.48% short interest, would be right to flag this yield as not competitive against some lower-risk saving options like CDs, which are currently offering more than 5%. However, Farmland Partners offers capital appreciation potential from a critical asset class whose underlying value is likely set for appreciation on the back of the new geopolitical reality, a rising global population, and the increasing unavailability of water for quality farmland globally.

An Under Pressure Dividend

The internally managed REIT just reported fiscal 2023 first-quarter earnings that placed its tangible book value ("TBV") at $559.2 million , a 2.92% sequential decline, but growth from $491.2 million in the year-ago quarter. TBV per share was $10.53, also down by around $0.13 sequentially. Critically, the company's current stock price at $10.56 is a near-perfect reflection of TBV. However, NAV per share is estimated to be considerably higher. The company has consistently been able to dispose of its farmland at premiums to book value, with an April $3.7 million sale of an 862-acre farm in Arkansas completed at a gain of 24% over net book value. Hence, the actual realizable book value could be around 15% to 25% over the current TBV.

The REIT reported first-quarter revenue of $12.67 million , an 8.8% decline versus the year-ago comp and a miss by $830,000 on consensus estimates. Adjusted FFO, which excludes stock-based compensation among other items, was $0.03. This was a 25% decline from AFFO of $0.04 in the year-ago comp and was driven by rising interest expenses on the back of a balance sheet that held total debt of $441.6 million as of the end of the first quarter. Most of these are currently fixed but will float over the next few years. Critically, the REIT's next maturity is not until April 2025 when two fixed-rate bonds worth an aggregate of $25 million come due. The REIT's quarterly interest expenses rose by $1.1 million year-over-year to $4.9 million during the first quarter.

Is the dividend safe? Somewhat. The quarterly dividend declared of $0.06 means Farmland Partners is paying out 200% of AFFO to shareholders. The REIT is covering the dividend and share repurchases from farm dispositions. Three farms worth an aggregate of $3.3 million were sold post-period end, with Farmland Partners realizing a gain of around $600,000 on the disposal.

Farmland In Times Of Chaos

A further 11 farms have been placed under contract to sell for aggregate consideration of approximately $42 million, with the REIT expecting to realize a gain on sale that's around $9 million to $11 million.

I like that the REIT repurchased 1,458,386 shares during the first quarter, then followed this up with an additional purchase of 1,179,556 shares post-period end. I also like how diversified the portfolio is with 163,700 acres of owned farmland and 31,000 acres of managed farmland spread across 19 states and roughly 26 crop types and over 100 tenants. Portfolio occupancy is at 100%. I'm not taking a position here though as I'd expect more short-term headwinds to the share price that will only be partially offset by the low yield. However, farmland represents an asset class that over the longer term should provide solace from the chaos of the broader commercial real estate sector, the banking crisis, and high inflation. This is a hold.

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