Farmland is a unique property niche with only one real estate investment trust (REIT) that focuses on it. Is Gladstone Land Corporation (NASDAQ:LAND) worth a flyer, or would Realty Income's (NYSE:O) diversified portfolio, which happens to include vineyards, be a better way to play?
What's in a REIT?
REITs are a great asset class because they give individual investors access to rental properties that would be impossible to otherwise own. And, because they must distribute 90% of earnings, REITs have to pass rental income to shareholders. Most REITs own things that are fairly easy to understand, like office buildings or apartments.
For example, UDR (NYSE:UDR) is the third largest U.S. apartment REIT. But the company has changed over the years. It once bought second-tier properties that it fixed up so they could command higher rents. It's since sold off most of its secondary market assets and refocused on better properties in high-barrier and growing regions.
Today, the company operates in 23 markets with over 50,000 apartments and has moved into cities like New York and Boston that it had historically avoided. It's a very different company today than it was at the turn of the century. Despite these changes, however, there's little issue with the basic business model -- apartment rentals.
That's not exactly the case with Gladstone Land. While farmland may be easy to understand at a high level, it's far more confusing when looked at closely. For example, where's the best place to grow avocados? Is owning an avocado farm better than owning a lettuce farm? What does a well-maintained farm look like?
One look at a UDR apartment, and you'd quickly get an idea of how nice it is. Few investors could do the same thing with a Gladstone Land farm. And it's pretty easy to conclude that owning an apartment in New York City is a good thing... but what about the $2 million dollars Gladstone just spent on three blueberry farms in Van Buren County, Michigan?
With that purchase, Gladstone now owns 18 farms for a total of nearly 2,300 acres of land. The REIT pays a monthly dividend and has a yield of around 9%. That's an enticing proposition, but the risk is in buying something you don't know much about -- even if it offers a high yield. Farmland likely falls into that category for most people.
If you are interested in farmland, however, Realty Income offers a far more diversified alternative. The company generally owns single-tenant retail properties. However, in mid 2010, Realty paid $269 million for 1,690 acres of vineyard properties. The property leases are guaranteed by Diageo Plc, a global giant in the alcohol space. For comparison, Gladstone's blueberry farms are leased to True Blue Farms -- ever heard of them?
While farms make up 100% of Gladstone Land's business, Realty Income's agriculture investment only accounted for about 3% of its portfolio at the end of 2012, and probably less now after an active year on the acquisition front. The rest of the company's more than 3,500 properties are spread across 49 states and 46 industries. Realty Income offers far more diversification. And while you may not know if its vineyards are top notch, knowing that Diageo is backing the leases is pretty good evidence that they're worthwhile.
New sector, new risks
Gladstone Land is the first entrant in a new sector. It's high yield is enticing and well above the yields offered by Realty Income (about 5%) or UDR (around 4%). That could make it a great opportunity to get in on the ground floor of a burgeoning REIT sector, or a way to get trapped in a property type that isn't a good fit for a public REIT. Realty Income might be a better choice for those seeking agriculture investments while Gladstone Land builds its track record.
Reuben Brewer has a position in Realty Income. The Motley Fool recommends Diageo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.