Description
Opportunity
Farmland Partners Inc. (“FPI”) appears as an opportunity to take advantage of the disconnect between its share price and the value of its underlying farmland assets.
US Farmland Asset Class
US farmland assets are an inflation protected, stock market uncorrelated asset class that while having shown very limited appreciation over the last 5 years (2015-2020 CAGR 1.0%), has historically provided acceptable nominal value appreciation with 1990-2020 and 2000-2020 CAGR of 5.2% and 5.5% respectively.
Farmland Partners Overview
FPI is the largest public farmland REIT in the US, with a portfolio spanning approximately 158,500 acres across 17 states. It is currently diversified across more than 100 tenant farmers who grow more than 26 major commercial crops. Approximately 70% of its farmland portfolio (by value) is used to grow primary crops, such as corn, soybeans, wheat, rice and cotton, and the remaining 30% is used to grow specialty crops, such as almonds, citrus, blueberries, vegetables and edible beans.
FPI leases its land to independent farmers and uses the proceeds mostly to pay financial obligations on its debt and preferred stock, consistently achieving net income to common shareholders very close to parity.
Given this financial profile, FPI Value creation comes primarily from the appreciation of the land value, which is not reflected in the financial statements as the balance sheet records it at cost.
As of Q3 2020 management estimates that the NAV of the land assets based on USDA state-level data is ~$14 per share vs. ~$9.5 per share book value at cost and $8.55 current share price.
The $14 NAV is equivalent to ~12% higher value of land vs. the net book value of $1,060,596 as of Q3 2020.
Given this discrepancy, management has embarked over the last couple of years on a value accretive strategy of asset dispositions and repurchase of share. Since 2018, FPI sold $84.9mm of land for a net gain of $14.4mm or 20.4% that confirms the higher actual land value vs. book value.
Valuation
Base Case Scenario (2% appreciation and NAV discount to 10%). 73.8% 3-yr Return
Better Case (5% appreciation and NAV discount to 0%). 139.3% 3-yr return.
Worse Case Scenario (0% appreciation and current 40% NAV Discount). No return
Projected financials don’t appear to represent appropriately the risk in a worse case scenario. The main risk appears instead related to diminishing rents and refinancing risks, in which case FPI may face difficulties servicing its debt and preferred payments and may be required to divest assets quickly on uneconomic terms. The low interest rate environment should mitigate this risk.
Conclusion
FPI appears as an interesting play on the farmland asset class, with potentially attractive returns based on a return to historically normal appreciation rates and REIT market vs. NAV discounts.
Main Risks
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Diminishing rents, causing inability to service debt and preferred payments
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Re-financing risk
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Devaluation of land assets
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst