The 10 year treasury is back under 2.4% which means more easy money for anyone looking to raise capital. In the presence of easy money, supply tends to rise as increased capital investments leads to increased production. The same goes for real estate as lower cap rates make development look more accretive. As such, we have focused the 2CHYP portfolio on supply resistant assets. I have made this argument before, but I feel it is important to reiterate as the supply resistant stocks are getting sold down on temporary headwinds. Specifically, the land focused REITs like Farmland Partners and Weyerhaeuser, are falling almost daily due to low commodity prices and trade headwinds.
Low lumber and soybean prices are legitimate headwinds that impact the near-term profitability of farms and sawmills, but let us remember that soybeans and timber are not the primary assets of FPI and WY respectively.
Overwhelmingly what these REITs own is land and the land is subject to a secular trend of appreciation that is improved by the low interest rate environment. Everything else in the economy is getting supply increased due to easy money, but land is having its supply reduced by easy money. More land is being converted to HBU and less retained for farms and timber.
The commodity prices may be filling all the news headlines, but secular trends matter far more over a long investment horizon. Both companies pay fully covered dividends, so we can wait as long as it takes for the appreciating land value to finally be recognized by the market.
Let us do some back of the napkin math to demonstrate the power of the secular trend of land appreciation. Historically land has appreciated at a rate closer to 3%-5%, but given the low inflation environment, let us use 2% annual appreciation.
FPI has about $1.1B in assets which would be appreciation of $22mm annually. Divided over ~31mm shares, that is about $0.70 a share. Thus, in owning FPI in the $6-$7 range we are getting over a 10% return from appreciation alone. The cashflows generated by the farm assets are mere icing on the cake. I view the trade war and low commodity prices as only impacting the icing with the appreciation remaining unharmed over the long term.