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2022 has been brutal for growth stocks and I’ve had to pivot my investment strategy towards more stable income-paying securities. REITs are playing a huge role in this change and farmland has always come up as a further way to build diversification outside of the more dominant REIT sectors. Around 30% of US farmland is owned by non-operator landlords and Gladstone Land (NASDAQ:LAND) happens to be one of these along with Farmland Partners (FPI). The McLean, Virginia-based externally managed REIT last paid out a monthly per share dividend of $0.0458, for a yield of 2.9% on its current share price.
The operational model looks attractive, they offer long-term sale-leaseback transactions which allows farmers to free up capital for expansion. They also offer farmers the option to expand into farms they do not own. Gladstone Land essentially purchases the farm and rents them to the farmer under a long-term lease agreement. The company also regularly buys farms from other non-operator landlords.
Gladstone Land owned 169 farms with 115,000 acres in 15 states as of the end of its fiscal 2022 third quarter. This was 100% occupied on a triple-net lease basis by farmers with a good operating history. The REIT focuses exclusively on the US and primarily targets nuts, fruit and vegetable cropland with access to ample sources of water.
Crop-Driven Dividend Income
So what benefits does Gladstone Land offer over and above its REIT peers? Farmland is generally considered to be a hedge against inflation. It’s easy to see why as it’s fixed and there is only a limited amount of good quality farmland that ever going to be available for cultivation. There has also historically been about a 70% correlation between the value of US farmland with CPI.
The model looks successful when assessing performance over a three-year time period, with common shares of the company up nearly 60% on a total return basis, versus 25% for the S&P 500. This comes in far below comparable peer Farmland Partners which is up 97% over the same time frame.
Year-to-date and the returns look less rosy with Gladstone Land down 44% versus around 20% for the S&P 500. The company’s Series B Cumulative Redeemable Preferred Stock (NASDAQ:LANDO) offers an alternative method to gain exposure.
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They currently trade at $23.95 and pay out a $1.50 coupon in monthly instalments, a unique distribution frequency for preferred shares. This is for a 6.26% yield that is more than double what’s available on the commons. They are currently past their January 2022 call date but seem unlikely to be called soon due to the company’s contained near-term liquidity position. As these are down 8.41% year-to-date versus 44% for the commons, they offer more stability but without the upside potential.
A Partial Inflation Hedge With Partial Diversification Benefits
Rising Fed fund rates have negatively impacted the performance of the REIT this year, an unfortunate event as a rise in interest rates has normally always been the direct response from the Fed to high inflation. During the earnings call for its last reported earnings for its fiscal 2022 third quarter, management flagged rising interest rates as the core reason for the slowdown in acquisition activity. That said, 99.8% of the company’s borrowings are fixed at a blended average interest of 3.26% for five years.
Farmland does face more structural risks from natural disasters like droughts and wildfires which would impede the capacity for farmers to meet their lease payments. This comes against the inherently volatile nature of agricultural commodities. Gladstone Land primarily focuses on short-lived row crops generally planted annually like sweet corn, tomatoes, strawberries, and beans. The prices of these gyrate according to supply and demand, a type of volatility that affects the financial performance of farms. That said, the company also has a primary focus on long-lived orchards, trees, and vines planted over long-term times frame. This covers nuts like almonds, pistachios, and walnuts and diversifies their tenant crop production portfolio. Gladstone Land’s tenant base is less exposed to the volatility of a single crop.
It’s hard to be bearish though with adjusted FFO for the third quarter coming in at $7.2 million, around $20.07 per share, versus $4.5 million, around $12.9 per share, in the second quarter. Fixed base cash rents also increased by 4% which was around $877,000 during the quarter as recent lease amendments and renewals came in strong.
Fundamentally, I find it difficult to call Gladstone Land an inflation hedge in a year where it underperformed the S&P 500 with inflation raging. Whilst the underlying mechanics of farmland look attractive for an inflation-conscious investor, accessing the asset class through the operational layer of a REIT creates a layer of execution risk. Hence, whilst interest in US farmland from investors like Bill Gates and Thomas Peterffy of Interactive Brokers has raised the profile of the asset class, investors should heavily consider the way they gain access. REITs are almost always the enhanced option to gain exposure to real estate across a range of sectors, but I’m not bullish on Gladstone Land here.