Thinking about investing in a publicly traded farmland REIT in the new year? The evaluation of its overall value can be a bit complicated, a research project by a University of Illinois Agricultural and Consumer Economics Ph.D. student found.
The two publicly traded farmland REITs have seen share prices fluctuate since their inception. But their current prices are roughly back to where they began.
Ph.D. student Shujie Wu conducted the research. She wrote, “About a decade ago, publicly traded farmland real estate investment trusts (REITs) emerged as an investable asset. A farmland REIT acquires and manages a portfolio of farmland for the benefit of its investors. REITs generate revenue from rental income, farmland operation, and land value appreciation. Shareholders in farmland REITs benefit from both dividends paid to shareholders and from increases in the REIT share price.”
Wu’s analysis focused on these two publicly traded REITs:
--Farmland Partners (FPI)
Heavier concentration in Midwest (corn, soybeans, and wheat are primary crops).
Also owns land in California and southeast United States.
Comparatively greater presence in California and other coastal states (tree nuts, winegrapes, other fruits, and vegetables).
Except for a dip in 2016, Gladstone Land stayed consistent in its share prices before rapidly escalating in 2021 and 2022 (more than doubling its value) and then declining since.
Farmland Partners’ fluctuations were smaller in comparison. That REIT’s share price steadily fell from 2017 to 2019 before rising in 2021 and peaking in 2022. But that peak was only slightly higher than its inception share price.
“Despite large returns observed over short time periods, the returns to holding farmland REITs have been limited in the long run,” Wu wrote.
Wu looked at what drives REIT share prices. Land values don’t appear to be primary drivers since those have increased by 40% over the past decade.
RELATED: Statista lays out land values in a chart, along with other relevant agricultural trends. Look at that here.
Wu identified three main areas of emphasis to determine their impact, if any, on REIT share prices: farm product prices, equity indices and climate change.
Her conclusion found that the farmland REIT history is brief and returns have been limited. “Investor interest in farmland REITs may be concentrated among those who prioritize consistent dividend income streams rather than share price appreciation,” Wu wrote.
The short history of farmland REITs may make it more challenging to evaluate contributing factors on their share prices. Wu offers this conclusion: “Short-run share price fluctuations depend on factors that include commodity prices and stock market returns. The FPI price appears to be more closely correlated to corn and soybean prices compared to Gladstone. Both REITs are correlated with returns on the stock exchanges on which they are listed, suggesting the portfolio diversification benefits of investing in farmland REITs may be limited. In the short term, sentiment about climate change has a negative association with the performance of these REITs, but this relationship is not statistically significant. The long-term effect of climate expectations on farmland markets requires further careful examination and measurement. Overall, our findings underscore the complexity of factors influencing the pricing dynamics of farmland REITs and emphasize the need for careful consideration of multiple variables in investment analysis.”
The Motley Fool provides more information on farmland REITS. The article cites their ability to provide capital to farmers (commonly using sales-leaseback transactions) and access to farmland for investors (makes it easier for those who aren’t wealthy or highly skilled with operational expertise to manage a farm).
Investments can include annual row crops/permanent crops/commodity crops, water rights, farming properties (cooling facilities, processing buildings, packaging facilities, distribution centers) and farm real estate-secured loans for farmers.
Those investments come with advantages and challenges. Here is how the Motley Fool article identifies those:
Farmland REIT Advantages
“Farmland has generally offered a better hedge against inflation that stocks, bonds and gold. Historically, there has been about a 70% correlation between the value of U.S. farmland and the consumer price index. Farmland investments with participation rents tend to benefit from inflation because rising food prices should enable the farm to sell their crops for a higher price.”
Attractive total returns
“Farmland provides investors with two sources of returns – rental income and capital appreciation. The two sources delivered a combined average annual return of 11% from 1992 to 2021.”
Farmland REIT Challenges
“Droughts, wildfires, insect infestations and other natural disasters can affect a farm’s harvest and ability to pay rent.”
“Crop prices can be very volatile, especially for annual commodity crops such as corn, soybeans and wheat, which can affect farm income.”
“Although farmland has overall been an excellent investment, farming has been a much more challenging business due to natural disasters, crop prices, equipment costs, labor costs, debt and other issues. If farmers run into financial trouble, they might not be able to make their rental payments.”
Higher interest rates often work against REIT share prices. It’s more expensive for REITs to borrow money and can limit their ability to expand with new acquisitions. That tends to push REIT valuations down during times of rising rates and investors may seek other options with lower risk and guaranteed growth.
RELATED: The Motley Fool offers more details about publicly traded farmland REITS, their possible portfolio diversity benefits, as well as expanded information about their potential benefits and drawbacks. Read that here.