Gladstone Land (LAND -0.39%) is one of a small number of farmland-focused real estate investment trusts (REITs). There's a lot to like about the company's focus and how it goes about investing in this niche. I wish I could love the REIT, but I just can't get myself to buy it. Here's why it might be better to put Gladstone Land on your watch list rather than your buy list today.
Why farmland can be a good investment
We all need to eat, and farmland is an integral part of meeting that need. Gladstone Land and Farmland Partners (FPI 0.46%) are the two notable REITs that offer investors a chance to put cash into the sector.
For more conservative investors, Farmland Partners is probably not a great option. For starters, a fight with a short-seller resulted in a dividend cut. Although this issue started way back in 2018 and the short-seller has admitted that the claims being made were not accurate, the company is still fighting the related class action lawsuits. Lawsuits are always a wild card, especially for a smaller company like Farmland partners, which sports a roughly $550 million market cap.
And, more recently, it announced plans to broaden its portfolio to include a broad array of farmland services, such as brokerage and management services, so it's no longer just a landlord. Indeed, service income will start to play a more prominent role in the business, with cash flows from things like brokerage services likely to be very lumpy. Therefore, for investors looking to simply own farmland, Gladstone Land is likely the best bet.
Image source: Getty Images.
However, you have to go in understanding a few things. For example, farm leases often include percentage of sales payments. Thus, rent collections can be lumpy in this inherently seasonal industry, making it hard to fully assess performance and dividend coverage.
Also, there are different types of farms. Gladstone Land focuses on fresh produce, fruits, and nuts, which tend to be more local in nature and less impacted by commodity price shifts than grains, which make up a big piece of Farmland Partners' portfolio.
Then there's the big picture, in which farmland has been converted to other purposes even though the global population has continued to increase in size. Notably, the amount of farmland per capita has fallen from 1.1 acres in 1960 to just 0.5 acres in 2020. In other words, this property type is becoming more scarce. That, in turn, will make farmland more valuable over time.
If you can get your head around the nuances here, there are some material things to like about farmland and, more specifically, Gladstone Land.
The problem
And yet there are some notable negatives that keep me from putting down roots in this REIT.
For starters, the dividend yield is a tiny 1.8% or so. While that's more than the 1.3% investors could get from an S&P 500 index fund, it's below the roughly 2.2% you could get from the average REIT, using Vanguard Real Estate Index ETF as a proxy. That 1.8% is also well below what some of the largest and safest REITs are offering; Realty Income and Federal Realty offer yields of 4.4% and 3.5%, respectively. Simply put, there are other dividend options that are more attractive.
As a REIT, Gladstone Land has to pay out 90% of its taxable earnings as dividend. Still, its yield is still near its lowest levels ever. Note that stock prices and dividend yield have an inverse relationship, so the over 130% increase in the share price since the start of 2020 plays a big part in the story here. It looks like investors have priced in a lot of good news, leaving the stock richly valued. I have a value bias, so this is another reason to pass on Gladstone Land.
While the dividend has grown steadily since it was reset in 2017, if you consider that low yield, this growth isn't enough to offset the valuation issue. Nor does the dividend growth live up to other growth-oriented REITs like Prologis or Innovative Industrial Properties. In fact, over the past five years, Gladstone Land's dividend growth has been below that of higher-yielding Realty Income and Federal Realty. I would rather own a higher-yielding name that's provided better dividend growth.
I'm watching and waiting
Given its low yield, high valuation, and modest recent dividend growth, I just can't bring myself to pull the trigger and buy shares of Gladstone Land. I like the REIT's focus and the fundamentals of the farmland niche, but now isn't the time for me to add this name to my portfolio. It's a wish list stock, with the hope that the market eventually throws the baby out with the bathwater and I'll be able to get a better price.
