, the largest ofthe three farmland REITs, will consolidate its leadership position in thenewish niche space when it closes its pending of in the next fewmonths.
S&P Global MarketIntelligence recently caught up with Paul Pittman, Farmland Partners' executivechairman, president and CEO, to discuss the company's growth strategy andevolving investor base at a time of broader change in the real estateinvestment arena.
What follows is an editedtranscript of that conversation.
S&P Global MarketIntelligence: The company has cited diversification as a primary benefit of thepending merger with American Farmland, but some say diversification in yourline of business opens a company up to more risk via volatile specialty croppricing. What do you say to an investor who sees diversification as a risk?
Pittman:Some people don't quite understand what we are looking to accomplish, and thereality of the economy of global food production. My view is thatdiversification is fundamentally a good thing, but you have to do it the rightway.
Ourstory is about global food demand in the face of land scarcity. It's not aboutcorn or almonds or sweet potatoes. We want to build a portfolio that basicallyreflects, on a dollar-weighted basis, the production agriculture industry ofthe United States overall, which is a pretty good proxy for the world overall.We want to be roughly 75% row crops and 25% specialty crops. With this deal,we're right about at that level.
Each of the farmland REITshas taken a slightly different approach to the business. Does it matter to youwhat the other guys are doing at this stage of the evolution of the space?
Idon't care at all about what the other companies are doing, because there arebig differences between our company and the others.
Forone, I did this with my own money for 20 years before we went public. Icontributed land that I'd owned for decades, and I still own millions worth ofstock in the company, so I think like a CEO and a big shareholder. The otherCEOs didn't take their life's work and roll it into a public company, and theydidn't have 20 years of prior experience buying farmland and investing in it.
Myhistory in and around farmland informs my views in a very strong way.
There's a lot of privatelyheld farmland out there. Can you speak about acquisition opportunities? Isthere a state, region or type of property that you absolutely will not touch?
Thebig deals get our name in the newspaper, but the bread and butter of our businessare the $3 million to $15 million transactions. This is a very fragmentedindustry, one that tends to be a family-business-size industry, so we focus onthose size deals.
Asfar as our pipeline goes, there's $30 billion of farmland for sale every yearin the U.S., so there's no practical limit on our ability to grow thisportfolio. But there are a few states where the law basicallyprevents us from investing: Iowa, Minnesota and North Dakota are among them.
Are there many big farmlandportfolios on the market at any given moment?
There'sa decent handful of $50 million transactions, where people have accumulatedthat much land after multiple generations. Some of those portfolios areavailable but, generally speaking, the $200 million deals are pretty rare.
You mention drought as a riskfactor in your filings. How prominent is that factor now on yourrisk-management radar?
Inhuge parts of the U.S., like the Midwest, the issue is too much water, not toolittle water. The summer months can be very dry in the Mississippi Delta and inthe Southeast. Out west, in the high plains, water is in shorter supply, and italways will be. The move there is to look for dry-land farms that are growingcrops appropriate to the climate. You just have to be careful.
Whatwe shy away from are properties where their only source of water is aquifersthat don't recharge. That's a real risk, because those water resources are likean oil well — they eventually run out.
Some cite the company's sizeas an ongoing issue for the company. Does Farmland Partners have a market capgoal?
Sizedoes matter, to the extent that the market uses size as a proxy for liquidity.A $500 million market cap is the minimum point at which people quit worryingabout size. A $1 billion market cap is even better.
Afterthis transaction, we'll have around a $400 million implied market cap, so we'regetting there. We're much larger than the other REITs in the farmland space,and we trade at much higher volumes every day. Our volumes and AmericanFarmland's volumes will basically combine after the merger, and we'll probablytrade several hundred thousand shares a day. Nobody can get out of a $40million position overnight, but you could in the matter of a week or two.
Ouraim is not growth for growth's sake, but growth to deliver ever-increasing cashflow to our shareholders, and increasing value over time. Our belief is thatuntil we own around $2 billion of assets, we will continue to registersignificant gains on the selling, general and administrative side.
I want to ask you about yourinvestor base and how it has evolved with your growth. Are you getting moretime these days with the institutional REIT guys? Is that even a group you'retrying to court?
We'reafter every high-quality investor we can get. Every time we get a little bitbigger, we get more interest from bigger investors. We've started to attractquite a few institutions and hope to keep doing so.
Todayour stock is about 50% or 60% institutionally held. We went publictwo-and-a-half years ago as a retail stock, with $70 million in assets. For asmall company, we've had a lot of institutional interest already. Where youreally want to get to with institutional ownership is about 70%.
I'm wondering if you've registeredany changes in your investor base as a result of the breakout of real estate inthe Global Industry Classification Standard.
Wehave everything from small-cap value agriculture investors to natural resourceinvestors, in addition to the traditional REIT investors. It's a multiprongedgroup of investors, and that's what we want.
Weare a REIT story, but fundamentally, it's a food and agriculture story. My viewis that this is the safest and most efficient way to participate in the foodand agriculture industry, because the land is the most stable part of the assetclass. The farmer always needs the land, but doesn't always need the tractor.