How Safe Is Farmland Partners' 6% Dividend Yield?

Summary

• Farmland has been an attractive asset class over the last few decades.
• Farmland Partners offers a high dividend yield, that is not fully covered by funds from operations though.
• Farmland Partners looks rather expensive right here. Capital appreciation in the near future is thus not very likely.

Thesis

Farmland (as an asset class) has delivered great returns in the past, thus Farmland Partners (NYSE:FPI) theoretically has the potential to do so as well, but shares still look rather expensive. The stock thus is mainly interesting for income focused investors, due to a very generous dividend yield.

Farmland Partners owns row crop farmland primarily, but the company also holds other assets:

The company's assets match what the total US crop market looks like pretty closely, with about 80% row crops and 20% permanent & specialty crops, such as almond trees.

In the long run farmland has been a very solid investment, $100 worth of land turned into $3000 over the last fifty years -- a 2,900% total return, or a little bit more than seven percent annually.

We see that there are peaks and times when farmland prices declines, but overall the match with an exponential growth function is very good.

Farmland also has been a very strong performance driver in shorter period of time, such as since 1990: Farmland returns were higher than even those of the NASDAQ, and only slightly lower than the returns the REIT sector delivered overall. At the same time farmland has pretty low volatility, which means the asset is attractive from a risk-reward standpoint (or at least has been in the past). Due to the world's population growing exponentially, and an increasing number of people earning increasing living standards, the growth story for food, and thus also agriculture in general, seems to be far from over. This is especially true as the total area that can be used for farming is not growing at all (rather shrinking on a global scale, due to desertification etc.), which means that the value of farmland should increase in the long run as well.

Since we now know that farmland as an asset class is attractive, let's look at the company more closely. Farmland Partners is well diversified geographically in the US:

The company holds farmland worth about $1 billion, in 17 states and is working with a triple digit number of different farmers -- the company is not too reliant on one single customer, and the diversification among crop types (30 different) means that Farmland Partners' customers are not too reliant on the price performance of one single crop, such as wheat.

Farmland Partners' financial performance has been very solid over the last years, the company grew its revenues by a whopping 600% from 2014 to 2016, which made AFFO per share grow by 380% as well. The weaker performance relative to the company's revenues is easily explained by dilution stemming from a growing share count -- the company issues shares in order to finance its acquisitions of farmland (which, in turn, allows for revenues to grow at a fast pace).

With AFFO of $0.58 per share for the last fiscal year Farmland Partners looks rather inexpensive right now, at a share price of $8.60 that would mean a price to FFO ratio of a little below fifteen. Farmland Partners' dividend ($0.51 per share per year) looks well covered when we compare it to 2016's AFFO as well.

Unfortunately the AFFO growth story has likely ended for the foreseeable future, as the company's Q1 2017 results showed AFFO per share coming in at just $0.01.

Revenues, net operating income and adjusted EBITDA all were up compared to the first quarter of 2016, but the low funds from operations number spells trouble for the year: The company sees this year's AFFO per share at $0.33 to $0.37 -- a lot less than the 2016 number, and also less than the company's dividend per share. When we exclude the weak first quarter AFFO and only look at the expected AFFO for the next three quarters ($0.34 at the midpoint of guidance, or $0.11 per quarter), the number still is a lot weaker than what Farmland Partners delivered last year -- and also still too low to fully cover the company's dividend payments.

Based on $0.35 in AFFO for the current year, Farmland Partners doesn't look inexpensive any longer -- the company trades at 25 times this year's AFFO, which is pretty expensive for a REIT.

The company's dividend, that yields 5.9% at the current price, is not fully covered by AFFO, but I still believe that a cut in the near future is rather unlikely. The company holds $1 billion in assets and has a rather low debt to capital ratio (about 50%), thus adding a million dollars in debt per quarter to cover the dividend seems pretty doable. In the long run the company will have to increase its cash flows significantly, since the dividend can't be paid via debt forever, but for a couple of quarters that would not be a big issue.

Since Farmland Partners thus offers a nice dividend yield, but trades at a rather high valuation, I feel it is primarily attractive for income investors right here. Those who want to play farmland as an asset class and who have a very long term outlook may find Farmland Partners attractive at its 52 week low as well, but due to a rather high valuation (despite the share price drop) near term capital appreciation will likely not be significant, I believe.

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Analyst’s Disclosure: I/we 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.