As you saw from the trade alert, we sold Farmland Partners this week due to the earnings report sending the stock up around 10%. This is a stock we will likely buy back at some point as even after the 10% move it remains an impressive value proposition. I want to dig a bit deeper on the value proposition as it is different from most other REITs.
REITs are valued both on the value of their underlying assets and on their cashflow. Generally, the value proposition is similar in both categories. In other words, REITs trading well below their NAV usually also come at a low multiple on FFO or AFFO. For Farmland Partners, this is not the case.
USDA farmland valuation data suggests FPI’s land is worth around $12 a share or approximately double the current share price. From this standpoint, FPI is among the best value propositions one can find. On cashflow, however, FPI looks fairly priced. 4Q18 AFFO came in at just $0.22 bringing total 2018 AFFO to $0.24. This translates to a 25X trailing AFFO multiple using a $6.00 stock price. Given the asset class, a 25X multiple seems about right to me.
So which is it: is FPI trading at half of its value or fully valued?
The answer comes down to which way the NAV and AFFO will converge. Will the AFFO come up to match what would be appropriate for assets of that value or will the asset value come down to meet the earnings power.
My view is that the assets are presently underearning due to a confluence of negative factors in the farm industry. As these factors subside, I believe the AFFO will come up to match what one would expect given the asset value. However, this could take many years.
There are 2 extremely long term secular forces in play that have held true since the dawn of civilization.
- Food demand is rising
- Yield per acre is rising
Rising demand is working to increase crop prices while rising yield per acre lowers price realizations. Over time, these forces have largely balanced out, but in recent years the yield per acre has dominated the equation, causing corn and soybean prices to drop to levels where farmer’s margins are severely compressed.
February USDA forecasts suggest that corn is turning the corner with consumption expected to exceed global production by 445 million bushels. This should cause prices to rise considerably from last year’s harvest. Soybeans still look quite ugly with global supply still exceeding demand and I anticipate prices will remain low.
Since FPI gets a portion of its revenues from crop sale participation, its AFFO should be directly influenced by these macro forces. Eventually, trade wars will end and demand will once again overtake supply. Thus, I believe FPI is a winner in the long run. The path to its success, however, is going to be quite lumpy and I suspect the stock price will also.
Pending macro forces and FPI’s market price, we will likely buy it back when it looks opportunistic.