As the old saying goes, “Invest into land, because God isn’t making any more of it." In the long-term, investing in land is a smart idea because everyone needs to eat. Due to the growing global middle class population, rising food prices and food shortages, the returns we can get from investing in farmland have become even more attractive nowadays.
According to the United Nations, the world is estimated to have 2 billion more people by 2050, and thus we will need to increase our food supply by 60% in a world with increasingly untenable farmland and climate change. In the U.S. alone, fiood inflation accelerated for the 12th straight month to 10.1%, which is the highest level since 1981.
Source: tradingeconomics.com
In addition, more farmland is being turned into housing, factories, offices and more. Thus, as we can see from the charts below, the arable land per capita has been decreasing each year while the population has been growing. With a decreasing supply and increasing demand, it’s not a surprise that the price of farmland has increased.
One of my favorite stocks to take advantage of rising food prices is Gladstone Land (LAND, Financial). This farmland REIT has seen its stock price plummet by over 42% from the highs of April, making it a prime value opportunity in my book.
Business model
Gladstone owns 164 farms with approximately 113,000 acres across 15 U.S. states, in addition to 45,000 acre-feet of banked water in California, valued at approximately $1.5 billion. The average acreage lease rate is 100%, which is fantastic.
Gladstone specializes in buying farmland primarily used to grow healthy foods such as fruit, vegetables and nuts. The REIT’s management team believes investing into farmland used to grow “healthy foods” as opposed to “commodity crops” such as corn and wheat is a “superior investment" due to lower storage costs, lower price volatility and higher profitability (customers that eat healthier tend to have higher income levels, allowing for better profit margins).
The vast majority of its farmland is in California, followed by Florida and Michigan. Gladstone recently acquired an Olive Orchard in California and currently has a couple of other acquisitions under signed purchase agreements.
The REIT rents out land to farmers on a “triple-net basis," which means the farmer pays rent and insurance as you would expect but also all maintenance and taxes. This means the likelihood of a surprise hit to investor cash flow is limited.
Financials
For the first quarter of 2022, the REIT generated diluted funds from operations (FFO) of $0.192 per share, which was 9.2% higher than the equivalent period in the prior year.
Operating revenue was $19.9 million, which was up 24% compared to the $16 million produced in the first quarter of 2021. However, this was 12% less than the $22.8 million produced in the prior quarter. This decline was mainly due to $3.4 million less in participation rents. The good news is, management was bullish during the first-quarter earnings call on an increase in participation rents for the rest of 2022.
Gladstone has $665.7 million of total debt outstanding, which is substantial. The good news is that over 99.8% of these borrowings are at fixed rates of ~3.25% for at least the next five years, which is a positive sign given the rising interest rate environment. Gladstone has $49 million in cash as of the first quarter of 2022.
As a REIT, the company is obliged to distribute at least 90% of the taxable profits to shareholders. The company has increased its distribution 26 times over the past 29 quarters and now pays a healthy 2.4% yield to shareholders.
Valuation
For this REIT, I look at two different valuation metrics: the first is the net asset value per share and the second is the price-to-funds-from-operations ratio.
The total estimated value of all the farmland the REIT owns is ~$1.4 billion. This may seem like a bargain given the market cap is just $795 million. However, to calculate the net asset value per share, we need to subtract debt and preferred stock and then divide by the total number of shares. This gives a fair value of $15.54 per share. The stock is currently trading at ~$23 per share and thus is still 53% overvalued despite the large pullback.
The adjusted price-to-funds-from-operations ratio is ~30, which is cheaper than historic levels but still substantially higher than the sector median.
The GF Value line indicates a $17 per share fair value, making the stock significantly undervalued by this metric.
Gladstone Land is a great farmland REIT and a way to play the rising food inflation. It owns a diverse range of farmland across the U.S., and management is active in new acquisitions. The fundamentals are steadily improving and I would expect further tailwinds ahead. The only issue I see is the valuation, which has come down a lot but is still substantially higher than the ~$16 per share net asset value. Personally, I have made note of the $16 per share value estimate and might look at the stock again if it falls to this level or below.
