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Real estate investment trusts (REITs) have emerged as a great alternative for investors seeking to get exposure to this attractive market without committing thousands of dollars to a single property.
The value of farmland in the United States has risen steadily in the past 10 years. According to data from the Department of Agriculture, the average dollar value per acre of farmland in the country has moved from $2,170 in 2008 to $3,800, resulting in total gains of 75% and a compounded annual growth rate (CAGR) of 4%.
In this article, we will share further details about the most attractive farmland REITs for those looking to incorporate this type of hard asset into their portfolios.
Real estate investment trusts are vehicles that allow investors to get exposure to the real estate market without purchasing a property outright. They are structured as a trust, and their core business is to acquire and exploit different types of real estate assets such as residential buildings, commercial real estate, and farmland.
For an entity to be considered a REIT, it must invest at least 75% of its assets in real estate properties and payout at least 90% of its net income to shareholders in the form of dividends. In addition, the trust must have at least 100 registered stockholders.
There are various types of REITs depending on what kind of activity they perform and how they generate money for investors. Here, we explain the two most common types of farmland REITs.
Equity REITs acquire one or more properties and generate money for investors via rent payments and other similar forms of income collected from the exploitation of the asset while they also benefit if the value of the properties increases.
To raise capital, these vehicles issue shares for investors who are compensated by the dividends paid out periodically by the trust if the properties owned by the REIT experience an increase in their market value.
In the specific case of farmland REITs, these trusts may acquire farms located in different corners of the United States or the world and lease the premises to operators who exploit the land for their benefit while paying a fixed or variable amount of rent determined by the trust.
Debt REITs specialize in providing financing for real estate developers. They can also invest or originate the financial instruments involved in traditional real estate transactions.
These trusts can lend money to farmland operators who are looking to develop their respective properties or may provide financing for businesses that want to acquire farmland for commercial purposes.
Debt REITs make money via the collection of interest payments and other similar fees. The proceeds from their activities, after deducting all applicable operating expenses and taxes, are distributed among shareholders in the form of dividends.
Best Farmland REITs
REITs trade in the same way as stock. They are listed in an exchange such as the New York Stock Exchange (NYSE) or the Nasdaq and entitle the holder to vote during any ordinary or extraordinary shareholder’s meeting.
The holder of a REIT’s share is also entitled to receive the dividends paid out by the trust in proportion to the percentage of the trust the investor owns and is also affected by benefits or losses depending on how the price of the shares behaves in the open market.
1. Gladstone Land (LAND)
Gladstone Land Corp is a company that engages in farmland investing by acquiring property and leasing it to farmers through different kinds of arrangements, including a straightforward lease or a long-term sale-leaseback agreement.
As of October 2022, Gladstone owns 169 farms comprised of 115,000 acres across 15 states in the US and has an occupancy rate of 100%, meaning that all farms are fully productive. In addition, the fair value of its portfolio of properties currently stands at around $1.5 billion.
Investors can get exposure to Gladstone’s business by acquiring a share of the REIT. These shares are listed on the Nasdaq Global Market Exchange under the ticker symbol LAND (NASDAQ: LAND).
In the past 10 years, LAND has delivered total gains of 134.6% (9% CAGR). During that same period, the S&P 500 produced gains of 183.3% (11.1% CAGR). Meanwhile, the dividend yield of this REIT is standing at 2.4%. Dividends are paid monthly.
What Makes Gladstone Land (LAND) Unique?
Gladstone works alongside farmers to deliver tailored solutions to their financing and operational needs. They do this by offering three types of arrangements: buying the land from the farmer to help them free up capital, buying farms and renting them to farmers who have the know-how to adequately exploit the property, and buying land from people who don’t have the knowledge or will to exploit it.
This multi-pronged business model diversifies the trust’s revenue-generation capacity and provides the kind of stability one would desire in a real estate investment trust (REIT).
Who Is Gladstone Land (LAND) Best For?
Gladstone is a good choice for investors looking to get direct exposure to a business that makes different types of dealings with farmland. The monthly frequency of the dividend payments is also an appealing aspect of this REIT for investors who rely on this income source to supplement their living expenditures.
Gladstone’s farmland is predominantly concentrated in regions where fresh produce (e.g., certain berries and vegetables) or certain permanent crops (e.g., almonds, blueberries, pistachios, and wine grapes) are produced. So, if you are interested in getting exposure to this type of farmland, then LAND might be what you’re looking for.
2. Farmland Partners (FPI)
Farmland Partners engages in every aspect of farmland investing, from acquiring and leasing properties to running their own farms via a subsidiary called Murray Wise Associates.
This REIT also provides financing for farmers who are looking to acquire the properties they are currently exploiting. They collect income from rent, interest payments, and fees. This makes FPI a widely diversified farmland REIT.
As of October 2022, Farmland Partners owned 185,000 acres of land across 18 different states. The trust has over 100 tenants who farm 25 different types of crops. Its occupancy rate is 100%, and the gross book value of the properties it owns stands at approximately $1.1 billion.
Investors can get exposure to Farmland Partners’ business by acquiring a share of the REIT. These shares are listed on the New York Stock Exchange under the ticker symbol (NYSE: FPI).
In the past 10 years, FPI has delivered total gains of 50.8% (4.3% CAGR). During that same period, the S&P 500 produced gains of 183.3% (11.1% CAGR). Meanwhile, the dividend yield of this REIT is standing at 1.7%. Dividends are paid quarterly.
What Makes Farmland Partners (FPI) Unique?
FPI engages in both the bread-and-butter businesses associated with farmland, such as leasing, and also generates revenue from other less traditional activities like auctioning and brokerage.
This strengthens the business’s revenue generation capacity and may provide a cushion when rent income is suffering for one reason or another.
Who Is Farmland Partners (FPI) Best For?
Investing in FPI is perhaps best suited for investors who wish to get exposure to the core business of farmland, which is to buy, hold, and rent properties owned by the trust’s portfolios. This makes FPI a highly focused trust, and that kind of concentration can be positive during certain stages of the economic cycle.
Approximately 70% of Farmland Partners’ portfolio (by value) is used to grow primary crops, such as corn, soybeans, wheat, rice, and cotton. The remainder 30% is used to produce specialty crops, such as almonds, blueberries, and vegetables.
If you’re interested in these types of crops and what to get exposure in this regard, then you should check out this REIT.
Alternatives to Farmland REITs
There are other ways to invest in farmland aside from REITs. These are platforms that offer investment vehicles for both accredited and non-accredited investors. Farmland investment companies make it easy for retail investors to invest in farmland.
|Fees||Flat fee of 0.75% to 1.00% on the assets invested||Upfront fee of 1.00% to 2.00% and management fee 1.00% to 2.00% (**varies by deal)||None for investor; 3% origination fee for farmers|
|Highlight||Offers a marketplace for selling shares back||Offers ESG investments and low fees||Low barrier to entry in terms of fees and requirements|
|Best For||Long term farmland investors||Socially responsible investors||Non accredited-investors|
AcreTrader is a farmland investing platform that pools money from a group of investors to purchase farms. These properties are bought by a legally incorporated entity whose shares are distributed among investors. As a result, those who invest in one of AcreTrader’s properties own a fraction of the farmland they invest in.
Each share is the equivalent of 1/10 of an acre, and investors are compensated in two ways. First, they earn money from the rent collected from the farmland in proportion to the number of shares they own. In addition, the value of the property may rise over time as a result of favorable market conditions. If this happens, investors may also see the value of their shares increase.
Every property offered by AcreTrader has been rigorously screened by the platform’s team of seasoned professionals who only select investment-grade properties.
Annual yields are expected to range between 3% to 5% for low-risk properties, while the value of farmland could appreciate by 5% to 6% per year, depending on market conditions. Hence, investors may expect annual returns of 10% or higher when investing with AcreTrader.
AcreTrader’s investment opportunities are currently available to accredited investors only. The minimum investment required to participate in most of the platform offerings ranges from $15,000 to $40,000. Read our full AcreTrader review to learn more.
FarmTogether is a multi-faceted farmland investing platform that allows individuals and businesses to get exposure to this market either by purchasing a fraction of a property or investing a certain amount in one of the firm’s funds.
To participate in the platform’s crowdfunded farmland offerings, the minimum investment required by this provider is $15,000, and the holding period of each deal typically ranges from five to 12 years.
However, there are opportunities to exit the investments earlier by taking advantage of an annual liquidity window provided by FarmTogether. These investments generate earnings via rent income and capital gains if the value of the land increases.
Meanwhile, FarmTogether also offers a product called the Sustainable Farmland Fund, which is suitable for investors who prefer diversifying their farmland portfolio. The fund targets annualized returns of 8% to 10%, including annual distributions ranging from 4% to 6%. The minimum investment required for this product ranges between $100,000 and $5,000,000.
FarmTogether also acts as a broker and can arrange the purchase of farmland by a sole proprietor who will administer the asset at their discretion. In addition, they facilitate 1031 Exchanges. These are transactions that involve the exchange of a certain investment or business for a farm. Read our full FarmTogether review to learn more.
Steward is a crowdfunded farmland lending platform that offers financing for farmers through capital pooled from thousands of investors who are compensated by the interest payments made toward the loans.
Steward was founded in 2006 by one of the co-founders of the popular real estate crowdfunding platform Fundrise. It is a US-based private entity whose mission is to help farmers secure the financing they need for different types of projects they may have.
The platform regularly publishes new project offerings for investors to participate in. The term sheet of each offering includes details about the nature of the transaction that will be financed, the interest rate payable to those who participate, and the credit period.
Some examples of successful loans made by Steward include the purchase of a herd of cattle, the expansion of a farm, the construction of a meat-processing facility, and the purchase of equipment.
The minimum amount with which investors can participate may start at as little as $100, while interest rates may go from 5% to over 10% in some cases.
Taxation and Farmland REITs
The proceeds earned from a farmland REIT are taxed differently depending on where they come from. Income earned from the investment that is distributed in the form of dividends is typically taxed as ordinary income.
The positive side of REIT dividends is that they are only taxed at the individual level, as these entities are exempt from paying corporate taxes.
Meanwhile, capital gains earned as a result of an increase in the value of the REIT’s shares or the value of the land owned by the investor are taxed as short-term capital gains if the holding period is lower than 12 months or as long-term capital gains if the holding period exceeds that threshold.
Pros of Farmland REITs
- They provide exposure to the real estate market without having to buy a property outright for hundreds of thousands of dollars.
- The cost of trading REITs has been slashed to zero by most brokerage firms.
- Investors can use REITs both as a source of fixed income (dividends) and as a tool for wealth creation via capital gains.
- Farmland prices have been rising in the past 10 years or so.
- Buying shares of a REIT is easy and can be done in a matter of seconds via an electronic trading platform.
- Farmland REITs may be a good alternative to hedge against inflation as the value of crops tends to increase during inflationary periods, which makes the value of the land rise alongside.
- REITs are considered less volatile than typical stocks as their valuation is primarily backed by hard assets.
Cons of Farmland REITs
- The two farmland REITs named in this article have underperformed the S&P 500 index in the past 10 years.
- Dividends paid out by REITs are taxed as ordinary income.
- REITs can perform poorly during times of macroeconomic instability, especially if interest rates are rising.
How to Choose the Best Farmland REIT
When it comes to choosing the best farmland REIT to invest in, you have to look at key parameters and metrics to ensure you’re actually investing in a good product. Here are some of the key things you need to look at when assessing Farmland REITs.
Quality of the Properties
The revenue generation capacity of the portfolio of properties owned by a REIT is one of the most important factors to consider when investing in these vehicles. Ideally, the properties should generate ample net operating income and produce the kind of crops that are in high demand at the moment or whose supply is relatively constrained.
REITs should aim to have occupancy rates of over 95% to make the most out of the assets the trust has invested in. A 100% occupancy rate is the ideal scenario, which is an attainable goal.
Not all REITs generate revenue in the same way. Some may do more than just rent their properties as they may auction properties, serve as intermediaries in the sale of farmland owned by third parties, and provide financing. A diversified revenue stream could be a positive thing to look for in a REIT as long as all businesses produce positive bottom-line results.
REITs must distribute 90% of their net income to shareholders to remain tax-exempt entities. This dividend income can either supplement or be the most appealing aspect of investing in the trust. As a rule of thumb, the higher the dividend yield, the better.
However, some REITs may offer a high dividend yield as their properties have suffered a significant decline in their market value and, as a result, the share price has suffered. Investors must carefully analyze why a REIT may offer above-average yields before investing.
The value of farmland in the United States has increased at a rate of 4% per year in the past decades. Hence, a REIT’s historical performance (including dividends) should be at least higher than that. It is important to note that some REITs may have underperformed the S&P 500 or other equity indexes during long periods. This is not necessarily bad as farmland is an entirely different asset class and therefore, returns cannot be compared as apples to apples.
Management’s Track Record
The management team of a REIT must be experienced enough to identify opportunities in the marketplace consisting of attractively valued properties that can generate a decent income for the trust. Ideally, the trust’s C-level officers should have over 10 years of experience in either the real estate industry or any other economic sector that has a connection to agriculture.
FAQs About Farmland REITs
The following answers some of the most frequently asked questions about farmland REITs.
The REITs cited in this article have underperformed the S&P 500 in the past 10 years. However, they can be a great hedge against inflation and can also provide an extra layer of diversification to an investment portfolio.
No. Most exchange-traded funds (ETFs) that provide some sort of exposure to farmland focus on a specific commodity or a diversified basket of these products.
No. Any investor can buy a farmland REIT like the ones in this article. Only private REITs can be exclusively offered to accredited investors.
Farmland REITs are a great alternative to get exposure to this interesting and profitable segment of the real estate market. Nowadays, several companies have listed their shares in the public markets, which facilitates the process of investing in farmland.
Meanwhile, there are platforms such as AcreTrader and FarmTogether that offer a different alternative to investing in farmland by participating in crowdfunded projects.
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Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and has also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.