Farmland Partners has a rigorous underwriting process in place to evaluate potential purchases – one that considers soil quality, water availability, potential tenant pools, market access, the climate, and other variables.
That’s because when we buy a farm, we do so with the intention of holding that property for the long haul, building a relationship with a tenant, and letting the farm appreciate over the years to maximize investor returns.
But that doesn’t mean we never sell. In fact, the company has sold numerous farms in 2023 – more than $120 million worth as of Sept. 30.
So, why do we sell?
There are several reasons, including but not limited to, changes to a farm, area, or overall marketplace that makes the farm less appealing for the portfolio; an offer that surpasses our own internal estimates of an asset’s worth; the ability to help a tenant strengthen his overall business; and highest-and-best-use opportunities (e.g., other real estate development).
We’ve often said that farmland investing returns are two-fold: income received from tenants and asset appreciation gains occurring behind the scenes. Both buckets are driven by several factors, such as location, soil quality, and production history, and FPI clearly wants to maximize the appreciation and rental rates for all our assets.
That is why the company is constantly reviewing our farms’ past performance and looking to the future to determine whether we believe a property will continue to perform, or whether it might be riskier moving forward than first anticipated.
Paul Pittman, the Executive Chairman of the company, summed up this point well during FPI’s earnings call for the second quarter.
“[W]e are not selling our very best farms. We are selling farms where we are concerned of water challenges or market volatility challenges, or they are outliers for some reason in our portfolio,” he told investors. “We want to gradually concentrate this portfolio in ways that lessen water risk and lessen volatility of earnings to simplify the management of the business.”
FPI President and CEO Luca Fabbri referred to this strategy as “selectively pruning our portfolio” during the company’s third quarter’s earnings release.
This doesn’t mean that the farms sold are not productive, but their long-term risk might have changed since acquisition. For example, changes to water availability, specifically in California and the High Plains.
Of course, once farms begin to sell in our portfolio, word spreads, which can lead to unsolicited offers. Often, these bids are far higher than our internal valuation.
Whether these offers come from other institutional investors seeking to build a portfolio in a specific area, or local farmers seeking strategic expansion, we have a fiduciary responsibility to consider such offers and redeploy capital in a way that’s helpful to the company.
Offers might also materialize from buyers who have different ideas about how to use the farmland. While these highest-and-best-use opportunities are not our focus when choosing portfolio properties, the multiples on such transactions make them profitable for the company and its shareholders.
Finally, our favorite reason to sell a farm – a tenant looking to own the land they’ve been renting in hopes of scaling and improving the efficiencies of their own business.
“FPI wants to build lasting partnerships with tenants to generate profitability for them and our shareholders,” Pittman explained. “It’s a win-win, when we can make a profit and help a good tenant at the same time.”