Diversified, high quality portfolio of farms with reliable tenants ensures revenues and cash flows
For Q1 2015, operating revenues up 56% and net income up 257% on impressive operating margins
American Farmland (AFCO) was founded in 2009 and is an internally managed real estate investment trust (REIT) that owns a diversified portfolio of high-quality farmland in major agricultural regions of the United States. The company leases or rents 17 farms in Alabama, Arkansas, California, Florida, Georgia and Illinois to customers. American Farmland operates in four segments: Permanent Crop (3882 gross acres), Specialty/Vegetable Row Crop (1808 gross acres), Commodity Row Crop (4726 gross acres) and Development (4962 gross acres); with a portfolio of farms totaling 15,378 gross acres growing 21 crop varieties. The company typically owns farms for 10-15 years under short- and long-term contracts.
Farmland Returns Far Exceed the S&P 500 Index
The farmland investment industry is estimated to be worth over $2.7 trillion and has historically delivered higher returns with lower volatility relative to the S&P 500 Index. The National Council of Real Estate Investment Fiduciaries (NCRIEF) Farmland Index had annual returns of 16.7% over the last 10 years which outperformed the S&P500 Index by about 8.7% and experienced much less volatility over the same period.
Since 1991, the farmland industry has performed extremely well compared to the S&P 500 and industries such as apartment REITs and commercial real estate companies. Over the same time period, the farmland industry has delivered higher cumulative returns than the S&P 500.
American Farmland’s $100 million initial public offering
American Farmland plans to hold its initial public offering of common shares soon and expects to raise approximately $100 million. American Farmland’s partnership will use net proceeds from the IPO to pay down $20.4 million of the company’s revolving credit facilities, complete two acquisitions totaling $24.7 million and pay $8 million for development costs at existing properties.
Post IPO Risks
Because of American Farmland’s consideration as a REIT, the company cannot quickly sell farms in response to negative economic, financial and investment conditions, and this will impact liquidity for the company. If the company does not hold a farm for at least 10 years, any gain in value will be taxed at the highest possible federal corporate income tax rate. Short term contracts (less than 3 years) leave the company open to a loss more than long-term contracts which are less susceptible to decreases in rental prices.
The company’s portfolio of farms is highly concentrated in California, Florida and Illinois, with 79% of total gross acres located in these three states. The farms in these states accounted for 97% of total contractual rent in 2014 and 94% of total contractual rent in Q1 2015. Additionally, Golden Eagle Ranch accounts for almost half, or 48.2%, of American Farmland’s contractual rent for Q1 2015. If the performance from farms in these three states falls, revenue will be negatively impacted to a large degree.
American Farmland’s customers are typically family-owned and small and medium-sized independent farming operations, which carry substantial credit and liquidity risk should calamity strike, forcing the company to take on risks associated with the financial condition and liquidity position of its tenants.
Competition from other publicly-traded farmland REITs
After its IPO, American Farmland will become the third publicly-traded REIT with a focus on farmland.
Farmland Partners Inc. (FPI) was founded in 2013 and has a portfolio of 93 farms in 7 states that total about 49,346 acres. For the three months ended March 31, 2015, the company had total revenue of $2.1 million and a net loss of $181,000. Farmland Partners’ shares are down about 8% since the company’s IPO in 2014 and the company offers a dividend yield of 4.3%.
Gladstone Land Corporation (LAND) was founded in 1997 and has a portfolio of 33 farms in 5 states that total about 8,730 acres. For the three months ended March 31, 2015, the company had total revenue of $2.6 million and net income of $25,000. Gladstone Land’s shares are down about 31% since the company’s IPO in 2013 and the company offers a dividend yield of 4.4%.
REIT Distributions by American Farmland
American Farmland intends to distribute at least 90% of its taxable income to shareholders, per REIT requirements. In 2014, the company distributed $0.25 per share and in 2013 the company distributed $0.225 per share. Management expects distributions to be equal to or above historical values after the company’s IPO.
American Farmland’s portfolio of farms appraised at $171.1 million
American Farmland has a portfolio of farmland that grows 10 different types of products, giving the company a lowered risk to price volatility of a specific crop. Corn and soybeans account for the largest percentage at just 24% of appraised crop value. Despite operations in only 6 states, American Farmland is considerably diverse based on appraised value. The company strategically looks for acquisitions that will strengthen its position in the farmland market.
American Farmland has a strong history of growing the value of its farm assets. Over the last four years the company has grown net asset value (NAV) by about 12% from $10.47 to $11.69 per share. NAV per share is a key valuation index for REITs as it reflects the intrinsic value of a company’s assets.
Management Highly Experienced in Investments and Real Estate
Thomas Gimbel will serve as Chief Executive Officer of the company. Gimbel has held senior management positions with Optima Fund Management LLC, Credit Suisse Asset Management LLC (CS), Donaldson Lufkin & Jenrette and Smith Barney.
Geoffrey Lewis was named Chief Financial Officer and Treasurer upon the company’s founding, and is responsible for all finance and tax reporting. Lewis is responsible for finance, compliance and performance objectives. He brings over 20 years of financial experience to the company.
Robert Cowan was named President and Chief Investment Officer in December 2014. Previously, Cowan served as the Director of Agriculture and Timber of the Utah Retirement System. Before this, he held various positions at agricultural investment company Farmland Reserve Inc.
Q1 2015 revenues up 56% to $2.3 million as fixed rent revenue climbed 68% and participating rent increased 40%
For the three months ended March 31, 2015, American Farmland had total operating revenues of $2.3 million (up 56%), operating income of $589,833 (up 524%) and net income of $285,930 (up 257%), or $0.03 per share.
Revenue from fixed rent increased 68% and accounted for about 59% of total operating revenues while revenue from participating rent increased 40% and accounted for about 35% of total operating revenues.
As of March 31, 2015, American Farmland had $5.2 million in cash and cash equivalents, $26.9 million in total liabilities and $104.4 million in total stockholders’ equity.
American Farmland is a highly diversified company in a niche evergreen sector that has significantly outperformed equities over time. Moreover, management has proven its ability to sizably grow net asset value, which is a key factor in REIT and will boost distributions over time. Moreover, crop diversification and geographical diversity minimizes crop failure and commodity price risk, making this an ideal investment for income and return oriented investors.