LAND - Farmland Partners: Some Structural Merits But Not Very Compelling At These Levels

2024-01-02 04:30:22 ET

Summary

• Farmland Partners is a small-cap REIT with a decade's worth of experience in acquiring and managing farmland across North America.
• The farmland industry offers stability and long-term value appreciation due to increasing demand for food and limited supply of arable land.
• FPI's stock valuation and yield are not competitive compared to its peers, and technical indicators suggest caution in investing at current levels.

Introduction

Farmland Partners ( FPI ) is a small-cap REIT with a decade's worth of experience in acquiring, owning and managing farmland (row crops such as corn, soybean, wheat, rice, and cotton, account for 90% of FPI's total acres) across the agricultural markets of North America (across 20 states).

Note that over the past year, the FPI stock hasn’t particularly set the world alight, delivering only single-digit returns, when REITs have witnessed double-digit returns, and the benchmark index has delivered 26% returns.

If you’re contemplating a position in this stock, here are a few important considerations for your perusal.

Long-term Structural Tailwinds

Structurally there’s a lot to like about the industry in which FPI is involved. Unlike quite a few other REIT sectors that can be susceptible to the vicissitudes of economic cycles, food consumption is a given, bringing a degree of stability to this business; for context, the vacancy rates of farmlands managed by FPI is zero, whilst annual turnover rates are minuscule.

What enhances the value of these types of farmland properties, even more, is that arable land per capita in the US appears to be on the wane, so even without making large investments, your underlying property is becoming more valuable over time.

This is in contrast to the positioning of traditional real estate properties that often need to be augmented and enhanced by frequent capital and maintenance expenditures, and when the cycle eventually turns, these businesses have to deal with the challenges of excess capacity.

To get a sense of the innate capital appreciation involved here, one may consider exploring conditions in the Illinois farmlands as that state alone accounts for half of FPI’s portfolio. In around 53 years, average farm real estate values have witnessed YoY declines on only 6 separate occasions, and over the last 4 years, real estate values have grown every single year at a CAGR of 6.3% .

Valuation and Yield Considerations

Whilst we are appreciative of some of the favorable long-term narratives associated with this business, we are not convinced that the FPI stock offers great value, particularly in light of the financial outlook.

After a resilient couple of years, it now looks like net farm income could come off by -20% in inflation-adjusted terms, and one is unlikely to see a strong rebound for the foreseeable future.

The other point to note is that FPI has been pruning its portfolio quite significantly over the past year. At the start of 2023 it had owned farms of 165,200 acres, but as of 9M-23 this had declined by -11% on a net basis to 1472,200 acres. These relentless asset dispositions will filter through by way of lower topline, and management has already suggested that there could be a $3m hit on fixed farm rent for FY24 from the October outlook.

Then FPI’s existing farms under direct operations haven’t been performing too well, and even though, like most other REITs the company may get some benefits from lower interest rates next year, the variable rate component is not overwhelmingly large, unlike a few other REITs (as of 9M-23, the floating rate debt as a % of total debt stood at ~24%)

Nonetheless, consensus FFO (Funds From Operations) per share forecasts for FY24, through FY25 shows that even after two years FPI won’t hit the same threshold that will likely be seen at the end of FY23 ($0.17 per share). Thus, at FFO per share of $0.16 in FY25, FPI is priced at a whopping P/AFFO of 78x.

Contrast that with FPI’s close farmland REIT peer- Gladstone Land Corporation ( LAND ) which will likely deliver steady positive FFO growth of ~4% through the next two years. Yet LAND can be picked up at a significantly cheaper P/AFFO multiple (based on FY25 numbers) of 20.3x

Even from a yield angle, FPI is not very competitively positioned, if you’re willing to look beyond the special dividend it paid out last month; note that amongst all the specialized REITs, the FPI stock is currently yielding the lowest figure of 1.92%, and around 350bps lower than the sector average.

If one wants to get more specific, note that the FPI stock yields a figure that is currently 45bps lower than the stock’s own 5-year average. Crucially, the yield on offer is only half as good as what close peer-LAND is offering (3.83%), dampening the long case at current prices. Unlike FPI, LAND’s current yield is also better than its historic average.

Closing Thoughts – Technical Considerations

Besides the exorbitant valuations and the sub-par yield, one can’t be too enthused with what the charts are suggesting.

For the FPI stock’s fortunes to change meaningfully, one will likely need to see a strong sentiment shift towards the S&P GSCI Agriculture index , which captures agri-commodity movements, with a keen tilt towards the row cops that Farmland is exposed to.

For the uninitiated, previous studies have shown that there is a significant correlation between FPI and this index. As things stand the S&P GSCI Agriculture Index continues to be in a long slump, trading well below the psychologically crucial 200DMA, something which it has anyway failed to clear on four separate occasions.

If we look at the dynamics within FPI’s own weekly chart over the past two years or so, we can see that the stock has lost ground over time, trading within a descending channel. However, in Q4 last year, it managed to demonstrate decent strength, thereby also tilting the reward-to-risk equation quite unfavorably.

Hitherto, don’t also dismiss the impact of share repurchases in supporting the share price (as of October 26th, the company had deployed over $70m in buying back over 6 million shares through the year), but with the common buyback yield figure now back to strong double-digit levels, we are not convinced management will see great value in pressing the buyback pedal even further.

If one wants to contemplate a long position in FPI, one should ideally be getting in somewhere around the lower end of the channel; not at the current levels, which is hardly a breath away from the upper boundary of the channel.

Finally, if we look at how the FPI stock is placed relative to other options from the real estate space, we can’t see too many REIT-oriented investors eyeing the former as an attractive rotational candidate. As things stand, the relative strength ratio of FPI versus the real estate universe is currently around 18% higher than the mid-point of its long-term range.

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