Buying land vs. buying LAND?

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  • #12639 Reply
    Mike D.

    All right, the forum needs some more activity. So hopefully my ignorance on this subject can provide some fodder for discussion.

    I think farmland prices are headed for an upturn.  Of course, I might be mistaken, but let’s just suppose for the sake of this discussion that they are.

    Now, how could an investor get exposure to farmland prices?

    If I knew anything about farmland, I could go buy some. But I know nothing about farmland. And anyone who does, could see this suburban kid coming and take me for a ride. And if the particular plot of land I found turned out to have a problem, the overall upturn in farmland prices would do me no good.

    If I could buy my way into a partnership that owns a diversified assortment of farmland, that would be better. Heck, the partnership could even lease the farms back to the seller for some current income.

    Now, it might seem that’s what Gladstone Land (ticker LAND) does, and that I should just go buy shares and be happy.

    But there’s a difference. Unlike my imaginary partnership, Gladstone Land can just do a secondary and issue more shares, potentially diluting shareholders.

    If they go buy more farmland with the proceeds, I guess that could be no big deal. Suppose they owned 100,000 acres and had 100 million shares outstanding; then each share would represent a thousandth of an acre. Then if they issued another 1 million shares and bought another 1,000 acres, each share still represents a thousandth of an acre.

    But if they do a secondary and do something else with the cash, then each share represents less than a thousandth of an acre. Shareholders just got diluted, potentially canceling out any gains they would have been exposed to based on the appreciation of the assets.

    In my mind this makes buying shares of LAND less compelling than a notional direct purchase of farmland. Do folks agree? In practice, is there anything to keep LAND from diluting shareholders too much? The current income is certainly nice.

     

     

    #12641 Reply
    sdmarc

    Mike- I like LAND common but own the preferred LANDO instead at this time.  They are the best option to be invested in farm land. They don’t buy commodity type farms (wheat, corn, soy etc), they focus on what you find in the grocery isle plus nuts etc. Great management, good long term hold. Even the CEO says won’t get rich quick overnight in LAND but buy it and put it away. They raise money to buy more farms (which they lease..they don’t farm).   Listen to David Gladstone interview and you will feel more confident in there business model. https://www.listennotes.com/podcasts/the-ground-up/land-gladstone-land-corp-d15sDtjEX7I/  Price is too high for me. $14s is a better entry spot

    #12708 Reply
    Mrinprophet

    Mike… great comments and questions.  I also looked into investing in farmland last year.  I also own LAND preferreds and not the the REIT.  What I realized I was looking for was the performance of the NCREIF Farmland Index (https://www.ncreif.org/data-products/farmland/) and not really REITS (share issuance and volatility).  I even took a hard look at FarmTogether and listened to several podcasts with their founder and investment team.  Crowdfunding illiquid investments is an interesting and growing space, but I ultimately decided I’m not quite willing to invest there yet.  The illiquidity I can handle, but I’m just not sold yet on the the crowdfunded private partnerships yet.  FYI… Dane Bowler (one of the few on SA that I pay attention to) just did a note on LAND/FPI that is worth reading (he concludes both are fine, but LAND is expensive today).  I did end up purchasing Nutrien in the 30’s… as I figured they’d benefit from agriculture inflation, and purchased a little more TIPWX (not farmland, but private real estate).

    #12712 Reply
    Charles M

    I can throw in another which is WY. Not farmland in the traditional sense. But long term is a well run company. Being a REIT its going to have variable payout, not like a preferred. The back ground is interesting. Another timber products company Potlatch did quite well with having real estate new urban growth areas as the property increased in value it became worth more for development than growing trees.  Going even father back, you had Boise Cascade in the 60’s developing  planned developments on property they owned. Tejon Ranch, Texas Pacific land trust are public stock and another I deal with Irvine land co is private. There is also LMNR which I think as a higher risk play.

    Mike D so right about buying the land and the risks. Example lot of property for sale around the I80 and 505  by Vaccaville lot just farmland now, but 15 to 20 yrs high development potential. Problem is water. I know from conversations with people the water table is going down and peoples wells are going dry or getting contaminated. prices are high and if you can’t farm no income. Was looking at Oregon and saw a nursery for sale with property and a house. Problem is the owner had shut down the nursery. In Oregon, you don’t own the water rights, if you don’t use your allotment it reverts back to county water agency even if its ground water. Same is happening here in Calif.  Andy’s orchard in Morgan Hill Santa Clara county pays thousands for water to pump from his wells because county says the water is theirs

     

    #12714 Reply
    martin g

    You’re investing in farmland but you’re also investing in mathematicians waving a magic wand. These funds are as much about currency manipulation as they are about farming.

    I bought a bunch of LANDO cheap, thanks to gridbird and other posters here. And I haven’t even bought them a beer yet. Took the profit in my IRA trading account and held onto it in my regular account. Wouldn’t touch the new 5% issue, too low at a time when interest rates may have bottomed out.

    #12717 Reply
    Gridbird

    Mr. Inprophet, I enjoy Danes writing also. Articles have to be brief I get but he didnt get too deep this time on an actual reason FPI is better. FPI is kind of an enigma. I think the CEO seems to be a pretty truthful guy. One should read the conference calls. Not many CEOs will admit they have some crappy properties and will look to unload them if someone will pay more than they did, which he said last CC. He also said he wont mention which ones they are as he doesnt want to reduce the value of them.  I love that kind of talk!
    The cap structure of the company really isnt very deep. This is what he said last CC.

    . If you look at the leverage ratio that we have, just looking at straight debt, it’s in the neighborhood of the mid-40s percent of our overall capital structure. If you add in the two different preferred securities we have, you’re pushing into the high 60s percent, I believe. That’s probably over-levered at that point as continuing to buy back stock gradually makes that number frankly, worse but as I’ve said a couple of times the valuation differential between what we think the stock is worth and what it’s trading at drives us to go ahead and buy that stock back despite the negative impact on the overall leverage ratio of the company. It’s important to recognize that those two preferred are really long term sources of financing. Pref. A is callable.

    Reading between the lines of what he says, he almost feels comfortable self liquidating the company if that is what brings out the most max value for the enterprise. FWIW, I own the public B series preferred.

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