Agriculture REIT Farmland Partners Sells an Interesting Preferred
By: Tim McPartland,
August 15, 2017
By Tim McPartland
Farmland Partners (NYSE: FPI), which is one of two real estate investment trusts (REITs) involved in the ownership of agricultural land, has sold a new preferred stock offering that may interest investors because of the issue’s special features.
These 5.25 million shares, along with an additional 787,500 shares set aside for broker overallotment, are cumulative, but dividends are not eligible for preferential tax treatment. The new preferred is a “participating” preferred, which means that holders of this issue will be eligible to participate in the appreciation of farmland values in the future.
This participating feature of the shares is a potential reward, in addition to the 6% coupon this issue carries. There is only one other company that has issued participating preferred shares in recent years that I know of and that is American Homes 4 Rent (NYSE: AMH).
AMH is a REIT which was formed during the financial crisis to purchase single-family homes which it then rents out. In the case of AMH, the company pays an added dividend to holders based on increases in home values in the markets in which they participate. The added home value appreciation amount is paid at redemption.
The new FPI issue is set up as follows. The issue carries an initial coupon of 6% with its dividend paid quarterly. Additionally, the liquidation preference ($25/share) will be increased by 50% of the Farmland Value Appreciation (FVA) amount each year, if the value rises. This amount is determined he United States Department of Agriculture’s “land value report,” which is released each August.
No dividends or interest are paid on the FVA and it will not be paid to the investor until at least September 30, 2021, which is the first date the issuer has the option to redeem the shares. The redemption value would be $25, plus accrued dividends and the FVA amount. Technically, these shares are perpetual preferreds. But beginning on 9/30/2024, a penalty coupon of 10% will kick in if the shares are not redeemed by that time. The FVA calculation will end at this time. Because of this penalty coupon, the shares may effectively trade as “term” preferreds. One last little catch in this issue is that the company can force conversion of the preferred to common stock on or after 9/30/2021.
We recommend that potential investors take the time to read the prospectus for this issue to fully understand its special features.
Shares have begun trading on the OTC Grey Market under the temporary ticker symbol FPRRP and last changed hands at $25.30/share.
Tim McPartland is a private investor with over 45 years of investment experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.