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WEST DES MOINES, Iowa (DTN) -- Wall Street's romance with farmland hasn't waned despite commodity price setbacks. In fact, professional investors attending the recent Iowa Land Expo see the steep drop in crop prices since 2013 as a buying opportunity for farm real estate.
Three publicly traded agricultural real estate investment trusts (REITs) now join other institutional investors combing the country for farmland deals. Although total investor ownership of farmland is just a small slice of farm sales, interest is increasing as farmland values slide lower.
"We're finding good return deals in this market. You just have to be selective," said Paul Pittman, CEO of Farmland Partners Inc., the Denver-based ag REIT that made headlines in 2015 with the record purchase of 22,300 acres in Illinois.
Farmland Partners Inc., listed on the New York Stock Exchange (NYSE: FPI), is the largest publicly traded agricultural REIT. It now owns 258 farms for a total of 107,900 acres in 13 states. Another REIT, Gladstone Land Corp. (Nasdaq: LAND) based in McLean, Virginia, owns 43 farms totaling 16,810 acres in six states. The newest publicly traded company devoted to farmland ownership is American Farmland Company (AMEX: AFCO), whose agricultural headquarters is in Salt Lake City. It went public in October 2015 and owns 18 farms in six states (California, Illinois, Arkansas, Alabama, Georgia and Florida) with about 16,000 acres.
While farm operators are somewhat wary about investors competing to buy farmland, "we don't set high prices," said Pittman. "A well-financed farmer will out-bid an investor looking for a higher return. In fact, we support the market at the lower end [when few want to bid on a farm]."
LOOKING FOR HIGHER RETURNS
Wealthy individuals also remain on the hunt for farmland, said Steve Bruere, CEO of People's Company, a real estate/farm management company based in West Des Moines. "We get calls all the time: 'I've got $10 million and want a 5% annual return, do you have any farmland property I could buy?'"
Bruere tempers their expectations, given lower commodity prices and rents. "You're not going to find that kind of return in row-crop farmland," he said. "Today, we're looking at a 3% to 3 1/2% cap rate (cash rent divided by land value)."
For example, $250 per acre cash rent divided by $8,000 per acre land yields a 3.125% return (cap rate). "In this land market, you might be able to get a 4% gross return, before property taxes. For good-quality land a year or two ago, you might have been able to get $350 per acre, but now you're looking at cash rent levels more around $250 per acre," Bruere added.
Pittman believes deals can still be had. "It depends on the area, as to what return we're looking for," he said "In the Southeast U.S., we want a 5%-5.5% return rate. In the Delta: 4.5%-5%. In the High Plains: 4.5%-5%. In eastern Nebraska: 4%-4.5%. In Illinois or Iowa: 3.5%-4%." The higher the risk, the higher return.
For specialty crops, such as vegetables or permanent crops (orchards or vines), Pittman looks for a 7%-8% return on investment, but he is not a big fan of permanent crops.
"I don't want more than 15% of my portfolio in specialty crops because two-thirds of the value of the purchase is wrapped up in a tree or vine that won't last forever. For example, a disease or storm could wipe-out an orchard, or consumer demand could shift (such as in oranges), or oversupply could collapse prices (as with almonds) and you're stuck with a permanent crop," he said.
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