Unique vehicle of farmland and crop ownership for investors.
Strong opportunity for acquisitions to power revenue and dividend payments.
REIT status will require 90% of earnings to be paid out to shareholders.
Several risks with dilution and relationships with executives.
Investors will get a rare and exciting opportunity next week with the initial price offering of Farmland Partners (NYSE:FPI). The company will give investors an opportunity to profit from high quality row crop farmland in North America. There are several risks, including high dilution and a complicated ownership structure, but if the company can qualify as a REIT, investors should see generous payouts and a way to profit from increased global consumption.
Farmland Partners owns and acquires farmland used for row crops, mainly corn and soybeans. The company has a portfolio of 38 farms, split between Illinois (33), Nebraska (4) and Colorado (1). Ownership interests also include three grain storage facilities. The company is offering 4.67 million shares at a price point of $14 to $16.
The company plans on acquiring more farmland, which is where investors will be rewarded. Proceeds from the offering will go towards paying off some debt and acquiring more land to rent out to farmers. The addition of more land is needed for Farmland Partners to diversify geographically and by crop type. If approved as a REIT, Farmland Partners will be the only public REIT focused primarily on row crop farmland.
Farmland Partners is currently concentrating on row crops, which center around grains (corn, wheat, rice), oilseeds (soybeans, rapeseed) and forage crops (alfalfa, grass hay, corn silage). However, through acquisitions Farmland Partners may also diversify into fields like produce, feedstocks, distribution centers, ranches and livestock.
The primary source of revenue for Farmland Partners is rent from its tenants. The leases are for 1 to 3 years and most are triple net leases, leaving tenants responsible for taxes, maintenance and water costs. The majority of the leases require annual rent payments due before the spring planting season.
The current portfolio has 38 farms. Here is a look at the five largest and the total acreage and rental income for the company:
Annual Rental Income
Pella Bins and Tracks (Illinois)
Farmland Partners plans on adding to its portfolio by using some of the proceeds from the IPO to acquire new crop acreage. The company has already identified and reviewed 15 potential deals, with total acreage of 43,000. All 15 deals would cost $151 million, so it is more likely that only several of them will take place.
In the risks section of the offering was one big red flag I found for this type of investment. When I think of farmland, I think of the Midwest region of the United States. Given the company's strong presence in Illinois, I thought it would be only natural for Farmland Partners to start buying up land in the Midwest region. However, certain laws prohibit this type of company to have corporate ownership of farmland in the following states: Iowa, North Dakota, South Dakota, Minnesota, Oklahoma, Wisconsin, Missouri and Kansas. This puts a damper on acquisitions and will leave out some of the key farmland states for this REIT.
The company's market opportunity:
- Growing global demand for primary row crops.
- Increasing pressure on global primary row crop supply.
- Global competitiveness of U.S. cropland.
- Diversifying and stable asset class.
- Unique real estate characteristics.
- Consolidating U.S. farming operations.
Farmland Partner's competitive strengths include:
- High-quality initial portfolio of farmland.
- Management team with extensive experience in agricultural real estate.
- Expansive relationships in the agricultural sector.
- Early-mover advantage as a leading owner of farmland.
- Flexible capital structure positioned for growth.
- Strong alignment of interests
Business and growth strategies going forward:
- Focus on current rental income generation and long-term appreciation.
- Continue the disciplined farmland acquisition strategy based on agriculture fundamentals: Targets farms of varying sizes, acquire farmland from undercapitalized owners and use OP units as acquisition currency.
- Diversify the portfolio by geography, crop type and tenant.
- Utilize its real estate management platform to achieve economies of scale.
The major conflict of interest comes from the company's close relationship with its executives. Most of the farmland will be leased to Astoria Farms and Hough Farms, which are controlled by CEO Paul Pittman and consultant Jesse Hough. Going forward, the company hopes to make acquisitions of farms that are unrelated to Pittman and Hough.
After the offering, Pittman will own 23% of Farmland Partners. Hough will own 4.5% of the newly created company. The complicated ownership structure could scare away some investors. The new Farmland Partners Inc. will be owned 95.9% by public shareholders and 4.1% by management. Under that umbrella is Farmland Partners Operating Partnership, which is 71.4% owned by Farmland Partners Inc. and 28.6% owned by Pittman Hough Farms LLC. With new acquisitions, that percentage could increase or decrease depending on how Farmland Partners pays the sellers. If they give them OP units as they have talked about, it could continue to decrease the ownership level of Farmland Partners Operating Partnership for shareholders.
Dilution is also high in this offering, as it is with most IPOs. New investors are paying 109% to own 70.6% of the new company. The average price of the OP unit holders for shares is negative $3.10. It is unusual to see a negative cost basis and I think that could spell trouble for the demand on this name.
With several risks and a busy IPO week ahead, this is one of those offerings that I see pricing below range or having a rough initial first day of trading. The big cloud hanging over the company is it's not technically a REIT yet and still needs to get approved as one. If the company is not ever a REIT, it will likely fall further. However, if approved for REIT status and several acquisitions get made from proceeds, I believe this is a great company to give investors exposure to farmland. Rather than going out and buying land and renting it out, investors get the management experience and the diversification of crops as an investment. Global food demand is set to rise and investors should use this company to keep up with the growth.
Information for this article was found at Retail Roadshow with a prospectus for Farmland Partners.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.