Farm Land Value Begin to Tumble
By: Tim McPartland,
December 27, 2014 2:30 pm
While we believe that owning quality farm land is a great long term investment (say 5 to 20 years) we have been critical of the REIT Farmland Partners (ticker:FPI) for many reasons.
First off their timing of the offering – could you pick a better time to lure investors into these shares than after a 500% rise in land values? Unfortunately investors initially bought into the shares which came public 04/2014 at $14–but it hasn’t gone to $14 since day 1. Shares closed on Friday at $10.86.
The kool-aid was drunk–the population globally is growing and everyone needs food–the EXACT argument that I remember in 1980 when ag land values skyrocketed–just before they collapsed and took 100’s of rural banks down. Yes, times have changed and banks no longer lend 100% of value on ag land–more like 50, 60 and sometimes 70%–but not 100% so we don’t have the same systemic risk that we had in the 1980’s, but we still have the mania of it all. Quality Iowa farm land hit $2500 (more or less) in 1980/1981 on the kool-aid, before falling 60% by 1985/1986. It was a full 20 years before farm land reached the 1981 level again (2001). You can see the data here. Now the drop in values has begun–and like almost all assets drops can take a couple of years and predicting the future is difficult at best and we make no attempt to forecast what the future holds–but we do know that it can be a very bumpy ride. Ag values in Iowa dropped from 8-13% during 2014 and it is fair to apply these drops across the midwest–the timing may vary, but the direction will be the same. This is one hell of a drop. Data is available here.
Now the above information is not specific for Farmland Partners (ticker:FPI), but there are so many other reasons to not own these shares NOW. The chairman claims he is smarter than everyone else (at least if you read the 10q’s and other fillings he claims to be the smartest ag land buyer in the world). Now we will see how smart he is since a large chunk of FPI’s land is rented by him–at sky high prices ($400/acre) when corn prices are 50% lower than 2 years ago–just maybe he will agree to continue this rental price since if he doesn’t the REIT will be hurt (no conflicts here are there?). Additionally we continue to question the compensation the officers receive, the quality of the land they are buying, the obvious conflicts of interest between management and the company, the distribution they are paying and the recent increase in payout when they are borrowing money like crazy and will have to go the equity markets again soon, the wisdom of approving a share buyback (is it really a buyback–or simply a jawbone to try to move share prices higher so they can sell more shares) and on and on. Is it obvious that we think these guys are looking for more kool-aid drinkers to lure into the shares.
Now the above being said, we are not against buying shares in FPI–today we are thinking that shares around $8-$9 might make a spot to by them at–but one has to be prepared to hold these shares for a very long time–at least 5 years. Today FPI pays a distribution of 4.27% which makes it maybe worth the wait (although how safe this is longer term is unknown since we have had no ‘clean’ financials yet from the company as they are purchasing land monthly as well as borrowing from Freddie Mac on a regular basis and financials won’t be clean until we can get all the one off’s out of the income statement). We will continue to follow the company closely and report our thoughts in the future.
NOTE–this little piece is not meant to be a all inclusive piece on FPI–we will do one of those when they release financials that are undertandable (clean). With all the one time charges etc it isn’t possible to do justice to a full blown analysis.