Recently I interviewed Farmland Partners CEO, Paul Pittman. In this 22 minute interview we discussed a host of topics including (1) farming in general, (2) how FPI is different from peers, (3) the status of the lawsuit, (4) the growth prospects, and (5) the safety of the dividend.
We sold our stake in FPI in January 2021 after clocking in a return of over 70% and in early March shares hit an all-time high (of $14.76). More recently, shares have pulled back (to a close of $11.21).
I will be working on a longer form farmland article in a few days….
Enjoy the interview (and transcript below)…
Hi everyone. This is Brad Thomas with the Ground Up and I’m back again with another CEO interview. And today I’m joined with Paul Pittman. Paul is the CEO of Farmland, ticker symbol is (FPI). And Paul, it’s good to be with you today.
Thank you, Brad. And always happy to talk with you.
Great. Well, Paul, I want to lean into a story that I read recently in the Financial Times titled Bill Gates, Farmland Buying Spree Highlights Investment Appeal. So Bill Gates, of course the co-founder Microsoft is now one of the, if not the largest private Farmland owner in the United States with over 250,000 acres, according to the financial times. So Bill Gates is obviously pretty passionate about Farmland investing. Why should the retail investor have that same passion for farming?
Well, I think it’s important to understand that what Bill Gates and his family have recognized about the asset class. It is fundamentally driven by ever increasing global food demand in the face of scarcity of high quality farmland. This is a zero vacancy asset class, which has gradual increases in revenue per acre through time, either driven by commodity price increases, but more likely by production increases and production efficiencies. So what you’ve got in this asset class is a very stable long-term store of wealth that in all likelihood will stay ahead of inflation and probably stay ahead of the long-term return on many other asset classes. Long-term appreciation rates of Farmland are in the 5% to 6% per annum range consistently, long-term total return, meaning the land price or the land appreciation plus the revenue break or you get on an annual basis from rents are in the 10% to 11% range over very long time friends.
And the Gates family has recognized this, but most of the wealthiest families in America have been long-term investors in Farmland. Lots of people value this asset class, we put it into the public market to make it easy to access and to give investors daily liquidity on the asset class. But we think… We applaud the Gates investment. We are happy to see it. It’s further confirmation that what we’re doing is a good investment opportunity for retail investors.
Great. Well, Paul, I want to also tie that into some possible tax changes. Now I’m working on a pretty detailed article now on the potential, what could happen to 1031 exchange as part of the Biden administration’s tax reform laws, of course, infrastructures, big news today. So to fund that infrastructure, we’re going to obviously see some changes to the tax structure in the US. There’s been a lot of debate more recently on the 1031 exchange business model. I’m of the opinion, Paul, that if the 1031 were to go away and by the way, I don’t think it’ll go away completely.
I get to the point of my article is I think the 1031 is going to have some changes, but probably not go away. They’re going to start with probably some limits is my guess. But at any rate, if 1031s were to go away, wouldn’t that actually be a catalyst for Farmland? Bill Gates doesn’t have a 1031 type structure. In other words, an UPREIT structure at his disposal, whereas Farmland has the ability to use UPREIT chairs for currency for farmers. So what are your thoughts on 1031 and the potential for you to utilize UPREIT chairs, more so in the future?
Well, we certainly would like to use our UPREIT chairs. A lot of the growth in this company came from UPREIT structured transactions. We hope that a significant portion of 1031 rules continue even if taking them away might be on the margin, beneficial for our company. I think it’s negative for the economy and wealth creation of citizens overall. So we certainly hope those rules stay in place. But I don’t know. I’ll be looking forward to reading your article. We think that yes, though, on the margin, if you got rid of 1031, we’ll have slightly more opportunities for UPREIT because it just lessens the alternative somebody has for tax deferral through making a further investment.
Right. Well, Paul, of course your company’s internally managed. We know that’s one differentiator from your, I guess, closest peer in the farming reach sector. What other differentiators do you see with Farmland overall besides the fact that you are internally managed?
Well, I think, I assume you’re referring to Gladstone, which is our closest peer. We have a somewhat different strategy than Gladstone and you know what, you should talk to them about what their strategy is, but what I perceive it as, as an outsider is they are more oriented towards specialty crops and vegetable crops, venture crops directly into human consumption, especially crops, meaning citrus tree nuts.
We take the view that the story is global food demand increases in the face of land scarcity. And that’s really a bet on all types of farm land and all types of crops. So instead of building a portfolio, that’s very focused on specialty crops and vegetables. We’re building a portfolio that has specialty crops and vegetables, but also has a substantial amount of grain farms. And that’s because the largest pieces of the nationwide ag economy are the primary grains, corn, soybeans, and wheat.
And if you avoid having a significant, in fact, majority of your portfolio focused on those crops, what happens essentially is that you’ve created a portfolio that is very focused on consumer preference and consumer demand increases for a few key products like strawberries, like tree nuts, pistachios, citrus, and other vegetables generally. And we just think that’s the mistake. And we think you’re concentrating risk by making that approach as opposed to this broad approach that in our view, anchors yourself to that big story, global food demand in the face of land scarcity
In terms of your growth. You’ve had a pretty impressive growth going back I guess five, six years or so, going from 200,000,014 to 350 million to 650 million, then you had the acquisition went over 1 billion. You’ve maintained this billion dollar market, our PSI asset, total assets I’m referring to. Paul, what do you see out there? Do you think there are any opportunities for any consolidation in terms of your pipeline? I know you’ve bought a lot of these one-off deals, individual farmers. Are there any portfolio opportunities out there for you to continue to scale up your business, or do you plan to pursue more of a regular pattern of just to these one-off transactions?
Well, we certainly investigate all the portfolio opportunities that exist. We do think achieving scale makes higher returns for our shareholders over time because of the efficiencies that we spread our overheads across. So we look at portfolio opportunities that are available from time to time. But I think most of the growth that we will have as a company is going to come from a series of individual transactions.
We have done some of the biggest ag transactions done in the United States ever, and we’ll probably continue to be competitive when those opportunities occur. But you really need to be willing to focus on growing this portfolio of one farm at a time and continuing to grow it. We’re set up to do that pretty efficiently. And that’s just necessary.
Right. I want to go back to that 100% occupancy, which I know is really one of the key value propositions for the farming sector, but I think you have less than 2000 acres that was really unleased as of the guess the latest 10K. So [inaudible 00:09:27] virtually 100% occupancy, how do you do that? How do you maintain that 100% occupancy model? I’m just curious, that seems too good to be true.
Tom, and it’s even better to understand that couple of thousand acres to say, it’s unleased. It’s unleased in the part of the year when there’s snow on it. Really unleased, you get paid, you get… I mean, it’s unleased in a technical accounting sense, but we get the same rent on that farm as long as even if lease expires in December or November and you re-lease it in March or whatever, you’ll get the same annual rent on the farm. You don’t miss that three or four month window in terms of the cash you collect.
And the reason for that is these farms are leased for the growing season, that’s where all the value is. A farm is again, technically leased during the winter, but nobody’s really paying you for the use of that farm when the ground’s frozen. They’re paying you for the use of that farm when spring comes.
So the reason that you maintain this zero vacancy, and it’s not just us, it’s industry-wide is that the fundamental demand for food is, and as food stuff’s grown on these farms is essentially insatiable. Elasticity of demand for food is different than any other product for practical purposes. If you see a price increase on corn, and you are a buyer of corn.
Here are your two choices, let those cows in that barn die of starvation or pay whatever price it takes. And I could repeat that, if it’s a direct food consumption product for humans, are you really going to let your kids go hungry? Well, maybe at some price and maybe there’s substitution and things like that, but this is a very different product. And if you just think about how you leave your own life in a common sense way, if copper prices got so really high, you just don’t buy any copper.
But if food prices get really high, you figure out how to steal the buyer. And it’s just always going to be that way. And the [inaudible 00:11:47] thing that’s going on is most of the primary commodities are storable. They will eventually be sold even in an era of surplus.
So you’re better off growing those crops. As an individual producer, you’re better off renting the land, growing the crop and continuing to sell it even for a low price, because if you have higher volume, your revenue breaker will still be strong. And you take all those things together and what you end up with is you have an incentive, a set of incentives in that marketplace for a farmer to always rent additional land even if that individual farm appears uneconomic to rent that year.
When he thinks about it across his entire operation, he probably is lowering his overheads on all the rest of his acres, such that he increases farm wide profitability, even if when they’re now analyzed on an individual basis, a given farm looks unprofitable it’s not actually unprofitable across that farmer’s entire operation. Because, he doesn’t need any more equipment. He doesn’t need any more tiny about mount of additional labor, probably his own. So not really paid labor, doesn’t need any more knowledge. All that he gets essentially adds those acres and gets a relatively low cost structure on those acres, which makes his whole operation more profitable.
Great. Well, I got two more questions for you Paul, one is, we’ve been covering Farmland since really their IPO. And of course, you had a difficult year in 2018 as a result of an article that went out that calls a pretty drastic share price reduction. I know that’s still finding its way through the legal process.
But now looking forward, or at least looking backwards through the entire period of time since we’ve been covering Farmland. You now have just recently, I guess in early March hit really an all time high of the almost $15, 14.76 a share pull back recently. But I did see that the company has bought back and impressive 7.6 million shares from 2018 through 2020 at an average price of around $6.50 per share compared to, again, the share price today, which is roughly about 11.27.
So I mean, certainly that’s been a tool at your disposal. How do you look at the growth of the company outside of the share buybacks I just referenced, what is the plan for Farmland to increase the cash flow per share, going into 2021?
So just a couple of things that are important going into the buyback. We believe we did that buyback at about 50% of what that stock was worth at the time we bought those shares back. We think we had an NAV of about $13 a share. Today, I’d say the NAV is a little higher, because Farmland’s gone up, it’s about $14 a share now. And we’re getting rapid appreciation in Farmland. So we did that as tactical. We didn’t like doing it, frankly, we didn’t want to shrink the size of the company, but if you’re that undervalued, it’s a smart application of capital to buying your own shares and we’ve done so.
The profitability or the accretion to the existing shareholders on a liquidation analysis is fantastic to have bought in that much stock at half price. Turning now to growth, and now that we’ve got our stock higher, we’re not likely to be as aggressive about buying back those shares. What we want to do is to gradually de-lever the company by investing in Farmland often with just equity into those farms. We’ve reduced that quite a bit. Whenever we sold the farm, we are arbitrage the private market value of Farmland against the public market to generate the cash we used for the buyback.
And so we were selling farms at average 15% or greater premium to what we had invested in those farms, and then buying back our stock at a 50% discount. And every time we sold the farm, we’d end up reducing debt because those farms usually add about 50 cents on the dollar of investment was in the form of debt. And we’d pay the debt down. We’ve also made and continue to make some additional debt reductions over and above that. So we want to get back to growth, but we’re very mindful of total shareholder return, which is a combination about as a dividend and price.
And so I think we’re likely to see us gradually try to grow the company with excess cash we have on the balance sheet, possibly with UPREIT structure and additional shares being issued to acquire farms. And you’ll see that happen. As far as cashflow recovery, we think there’ll be some cashflow recovery just from the specialty crop recovery that comes from COVID. We are in an environment today first time in probably five years where you can get meaningful rent increases when a rent comes up for renegotiation because farmer profitability is stronger than it has been in a long, long time.
The way industry generally works is that in a strong farm economy for the farmer, you can push rent increases. Then those rent increases essentially plateau. They don’t come down very much, but they’re not going to be able to go up in that tougher environment. And then they gradually start to rise again, when you come out of the negative cycle and go back into a positive cycle for individual farms. So we’re in that positive cycle, we would hope for a pretty substantial rent increases, which obviously increases in cash flow as well.
Thank you. And I did look, it looks like you’ve got… You booked up 16.8% average realized gain from 2018 to 2020 on disposition. So good job there. Finally, I want to touch on dividend Paul, is obviously you cut the dividend and so many reached it. You were early to it. I know a lot of it was, I guess, to preserve capital for the lawsuit among other things, but now you’ve got a lower yield, obviously I’m not driven by the sheer price that we discuss, 1.8% dividend yield, but at 22 cents a share, do you feel like that’s sustainable currently in the current environment that you’ve got right now?
Yeah, we’re 20 cents a share as our annual dividend. And so we would intend to maintain that dividend, look we’d like to have a couple of dividend, everybody would. And we think that if you adjust for all the excess litigation costs and the COVID impacts, we would have had a covered dividend in 2020. But this portfolio of Farmland as the asset sales we’ve made shows is always appreciated. It’s even appreciating in a top market and in a good farm market, it’ll appreciate even faster. So I think there’s a… Back to this point that I started with, you’ve got to understand that Farmland creates value two ways, and this is why Bill Gates and his family buys it. You get current yield. And as far as long-term value goes, more importantly, you get appreciation.
We’re comfortable distributing a little bit of that appreciation to investors that we need to, to maintain a stable dividend. We’re happy, frankly, with the relatively low dividend we have today, because what we think we’ve done is we’ve gotten a group of investors today that recognize that asset class for what’s so powerful about the asset class, which is that study long-term appreciation. And secondarily, is concerned about current yield. That reflects what Farmland is in the private market. And in my view, we would like the public market to reflect the private market characteristics as much as possible. This is a long-term store value, modest current yield, solid long-term growth, and asset value.
And so if the mathematics suggests “distributing”, you’re not over distributing if you think about it in the context of total value creation in that farm and that farm portfolio. Because, of course, as a farm appreciates over time, we don’t have to sell the farm, we can always just borrow a little more money if we want to do against that farm. Still, the leverage ratio is 50% of the value of the farm, but the value of the farm has moved up in the five years since you owned it.
So we’re not completely focused on having distribution be exactly equal to cashflow. We want to just make sure distribution is such that we’ve got the stability to maintain it. Because reducing our dividend, which we did now, right after the Rhoda unfortunate attack, the fund legal cost fundamentally, that’s devastating. It’s terrible. I mean, I was the largest shareholder when we did that. I’m now the second largest shareholder in the company. That’s a hard thing for me and every other shareholder to face, but we needed to do it. And obviously in a three-year rear view mirror view, it worked for us, it was the right thing to do.
Great. Well, Paul, I really appreciate your time. I know you’ve always bring us a lot of insight into the farming sector, which we greatly appreciate and congratulations on the sheer price move up. I know it can back pull back a little bit, but hitting that all time new high was I’m sure meaningful as well. So thank you for your time today and look forward to catching up with you again soon.
Okay. Thank you very much, Brad.
Brad Thomas is Senior Research Analyst at iREIT and CEO of Wide Moat Research LLC. With over 30 years of real estate experience, he is also long-time Editor of Forbes Real Estate Investor, a monthly subscription-based newsletter that dives deep into the vast world of profitable properties, and since 2021, he has served as an adjunct professor at New York University.
Thomas has also been featured on or in Forbes magazine, Kiplinger's, U.S. News and World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. And he was the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021 based on both page views and number of followers.
Thomas is the recently-published author of The Intelligent REIT Investor Guide (2021), co-author of The Intelligent REIT Investor (2016), and he wrote The Trump Factor: Unlocking The Secrets Behind The Trump Empire (2016) - all available on Amazon.
Thomas received a bachelor of science in business/economics from Presbyterian College and is married with five wonderful kids.