Farmland Partners: 14% off book value, shares are a buy (NYSE: REIT)
Farmland REITs are a unique asset class within the REIT industry in that they provide assets that people cannot live without. In this article, I focus on Farmland Partners (NYSE: REIT), which is one of the few publicly traded REITs in this space. Stocks have done well since I last visited the stock, in which I had a bullish rating.
Since then, the stock price has risen 19.8%, far outpacing the 9.4% return of the S&P 500 (SPY) over the same period. I still see value in stocks despite the recent surge and assess what makes the stock a worthy addition to a well-diversified portfolio, so let’s get started.
(Source: company website)
A Look at Farmland Partners
Farmland Partners, Inc. is an internally managed REIT that owns and seeks to acquire high quality farmland in the United States. As of September 30, 2020, the company had $1.1 billion in gross assets on 155,000 acres across 16 southern and midwestern states. , and parts of the western United States. Its lands are currently farmed by more than 100 tenants, who grow 26 major cash crops. Its current land use mix is 63% row crops (i.e. corn, soybeans, rice), 36% specialty crops (i.e. almonds, avocados, walnuts) and 1% livestock. An investment in Farmland Partners is like investing in US farmland, in general, because most US farmland is row-crop based.
Looking at the latest Q3’20 results, Farmland Partners is performing well in the current environment, with revenue increasing 8.1% YoY from $9.8M in Q3’19 to 10 $.6m in Q3’20. Revenue also improved for the first nine months of the year compared to the prior year period, increasing 3.4% year-over-year to $32.8 million. Importantly, the NOI was $8.6 million for the third quarter, representing a 10.2% year-over-year increase and $27.1 million for the nine months ended September 30, which represents a year-on-year increase of 6.3%. I see these positive results as representing the continued demand for Farmland’s essential assets.
It should be noted that Farmland Partners’ results exhibit strong seasonality, with the fourth quarter being the company’s financial driver. Therefore, investors will have to wait for the fourth quarter results to get a bigger picture of the company. Given the encouraging results so far this year, I expect the fourth quarter to show similarly positive results.
Management appears to agree that the shares are undervalued, as it repurchased 509,506 shares during the third quarter, at a weighted average price of $6.62 per share, for a total purchase price of 3.4 M$. This was funded through the sale of assets. So far this year, REIT has sold $104 million in assets with an average gain of 21.5%. I consider the Q3 buyback to be highly accretive to shareholders, as the weighted average buyback price of $6.62 per share represents a significant discount to book value. The company’s current GAAP book value is $9.57 per share. Thus, the repurchase price of the shares in Q3 corresponds to a discount of 31% compared to the book value.
Management still believes the shares are undervalued, as they estimate a net asset value between $13 and $15, and are actively repurchasing shares. It has about $41 million of remaining capacity under its current stock buyback plan. Additionally, company insiders have also been active buyers of stocks this year, with the CEO being the most active. The most recent purchase was made by a director for 10,000 shares at $8.03 per share. As seen below, the CEO currently holds over 2.47 million shares worth $20.3 million based on the current price of $8.24, signaling a strong alignment. interests.
Risks to consider
Although Farmland Partners has performed well this year, it should be noted that disruptions downstream in the food supply chain, due to COVID-19, could negatively impact its tenants. However, this would only be a short-term risk, as I expect supply and demand imbalances to eventually unravel.
In addition, Farmland Partners is subject to weather-related risks, such as hurricanes and wildfires. This risk is mitigated by the overall geographic diversification of the properties. Additionally, management noted on the last conference call that its properties have not been impacted by hurricanes or wildfires this year.
Key takeaway for investors
Farmland Partners continues to perform well in the current environment, with increased revenue and NOI in the last quarter and first nine months of the year. Looking ahead, I expect to see similar positive results in the fourth quarter, given the positive results so far, and no reports of significant food supply disruptions so far this quarter. . At the current price of $8.24, the shares are trading at a 14% discount to book value of $9.57 per share. Management estimates a higher net asset value, between $13 and $15 per share, and as noted on the recent conference call, is actively repurchasing shares in the open market. Given the above, I see continued upside potential for the stock price.
Author’s Note: Since REIT is a small-cap stock, appropriate risk limits in a well-diversified portfolio are recommended.
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