Are Better Times Ahead For Farmland REITs?

When investors discuss real estate investment trusts (REITs), they're generally focused on companies that own office buildings, shopping malls, stand-alone stores, self-storage units, warehouses or healthcare establishments.

But there are also specialty REITs that own and operate more distinctive properties, including those related to owning and operating farmland. Because this niche is so specialized, there are only two REITs involved in owning farmland. While neither has performed well in 2023, there is potential for one or both to stage a comeback. Take a look at the details.

Farmland Partners Inc. FPI is a Denver-based, internally managed specialty REIT that invests in farmland and originates loans to farmers that are secured by farm real estate. Farmland Partners owns and/or manages over 340 farms totaling 190,200 acres in 20 states.

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Farmland also owns land and buildings in Ohio for four agriculture equipment dealerships. Farmland properties produce 26 crops and have over 100 tenants. Farmland Partners is the No. 1 farmland REIT by total acreage.

Farmland pays a quarterly dividend of $0.06 per share and its annual dividend of $0.24 per share yields 2.3392%. With rising interest rates, most REIT investors are gravitating toward higher yields, and as a result, Farmland has not fared well this year. Its total return in 2023 is negative 16.14%.

But better performance could be in its future. Here are some reasons for optimism:

•  Recent insider purchases. On Sept. 27, CEO and Executive Chairman Paul Pittman purchased 100,000 shares at an average price of $10.26 for a total of $1.03 million. Pittman has made 107 purchases since 2014. and this is his largest ever. The purchase of 100,000 shares could indicate that Pittman knows things are improving and the stock is now undervalued. Over the past two months, several other company directors also received company stock in lieu of cash bonuses. 
• Farmland gave an update on Sept. 11 to reassure investors that no significant damage occurred to its farmlands from either Hurricane Idalia or Tropical Storm Hilary. In addition, Farmland reported that it has increased its rental rates in 2023 by over 15%.
• Recent analyst ratings have been favorable. In August, Raymond James analyst Buck Horne maintained an Outperform rating on Farmland Partners and raised the price target from $13 to $14.
• Farmland has realized gains on over $50 million worth of farm sales in the first half of 2023. Farmland is looking to add to that over the second half of the year and intends to use the proceeds to pay down higher-cost debt. 

A few cautionary notes: The annual $0.24 dividend per share is presently above the forward funds from operations (FFO) of $0.16 per share. This means the payout ratio is over 100% and cash reserves will have to be used to fund the dividend unless FFO begins to increase with Farmland's third-quarter results. With a 2.34% dividend yield, there isn't a lot of room for a dividend cut either if Farmland wants to maintain its income investors.

Farms sold may be beneficial for paying down debt, but the loss of assets also means a loss of earnings and revenue going forward.

Farmland missed estimates for both FFO and revenue in its second-quarter operating results. But the $1.03 million purchase by the CEO/executive chairman could be a tip-off that better FFO results are on the way.

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Gladstone Land Corp. LAND is a McLean, Virginia-based specialty REIT that owns farmland and related properties in major agricultural U.S. markets and leases or leases back its properties to farmers. Gladstone owns 169 farms with 116,000 acres across 15 states. Gladstone Gladstone also owns 45,000 acre-feet of banked water in California worth approximately $1.6 billion. About 40% of Gladstone Land's acreage is used for organic produce. Gladstone Land was founded in 1997.

Shares have been on a roller coaster ride since 2019. Shares rose from about $10 in January 2019 to a high of $40.33 in April 2022. But since then, shares have plummeted to a recent closing price of $14.23. Gladstone's total return in 2023 is negative 20.89%. Higher interest rates are the main reason for the decline. Wall Street is concerned that rates will affect Gladstone's long-term debt and its tenants' operations.

There are also some recent positives to report that could help shares rebound from the decimation of 2023.

Gladstone Land is a monthly dividend payer and raised its monthly dividend from $0.046 to $0.0462 in mid-July. Gladstone has now paid out 126 consecutive monthly cash distributions since its January 2013 initial public offering (IPO) and has increased its dividend 31 times over the last 34 quarters.  

Analysts have written favorable reports recently on Gladstone Land. In August, EF Hutton analyst Gaurav Mehta assumed Gladstone Land at Buy and announced a price target of $20. On Aug. 11, Ford Equity Research upgraded Gladstone Land from a 4 rating to a 3.

Although the second-quarter FFO of $0.11 was down from $0.13 year over year, revenue of $21.21 million beat the analysts' estimate of $20.39 million and was a 4.52% increase over revenue of $20.29 million in the second quarter of 2022.

There continue to be some risks present in owning Gladstone Land Corp. The annual dividend of $0.5544 yields 3.9%, but the payout ratio is nearly 86%, which does not afford room for much more dividend growth without an increase in FFO.

Gladstone admits that higher interest rates, coupled with high prices on farmland, have made it difficult to initiate new acquisitions. Some of the newer lease agreements have resulted in an aggregate decrease in annual net operating income from prior leases. This is a trend that could be temporary, especially if interest rates begin to taper off, but it's one worth following because it could impact Gladstone's ability to increase its FFO.

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