Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.
Matt DiLallo has positions in Gladstone Land. The Motley Fool has positions in and recommends Farmland Partners. The Motley Fool recommends Gladstone Land. The Motley Fool has a disclosure policy.
Real estate investment trusts (REITs) provide investors with an easy way to invest in farmland. Historically, the sector has produced attractive long-term total returns boosted by steadily appreciating land values and crop-driven rental income. Farmland has also traditionally been an excellent inflation hedge and isn't as volatile as other asset classes. These characteristics make farmland a superb way for investors to diversify their portfolios.
Here's a closer look at how to invest in farmland REITs. We'll dig deeper into how they make money, their advantages, and risk factors, and consider a couple of farmland REIT investment options.
Farmland-focused REITs typically serve two purposes:
Real estate investments by farmland REITs can include:
Farmland REITs typically sign long-term triple net leases (NNN) with farmers. This lease structure provides the REIT with a very stable cash flow that tends to rise each year either at a fixed rate or via an inflation-linked escalation clause. In addition, farmland REITs earn a percentage of a farm's gross revenue through participation leases on some farms. Participation income can vary from year to year, depending on crop prices.
Farmland REITs will also own and operate some farms directly, entitling them to all the crop income. They can also lease some of the farm's land for other purposes.
Farmland provides investors with three crucial advantages:
While farmland has been an excellent long-term investment, it isn't without risk. Farmland REITs face interest rate risk, which is common to all REITs. Rising interest rates make it more expensive for REITs to borrow money. That can be an issue if they have a large upcoming debt maturity or floating rate debt. It can also affect their ability to make acquisitions.
Meanwhile, REIT valuations tend to fall during periods of rising interest rates. Higher interest rates provide yield-focused investors with more attractive lower-risk options such as bonds or bank certificates of deposit (CDs). REIT dividend yields need to rise to compensate investors for their higher risk profiles.
In addition, farmland REITs face some specific risk factors:
Gladstone Land owned 168 farms with 112,000 acres in 15 states as of late 2024. This farmland REIT also owned 44,000 acre-feet of banked water in California. Overall, the REIT owned $1.5 billion of farmland.
The company primarily owns farms in regions where its tenants can grow fresh produce row crops such as berries and vegetables that are planted and harvested annually. It also owns farms that produce permanent crops such as almonds, apples, cherries, figs, lemons, olives, pistachios, blueberries, and wine grapes. Permanent crops typically get planted every 10 to 20 years and are harvested annually. The REIT leases the land to farmers under long-term NNN leases.
Gladstone Land focuses on fresh produce farms because they're less risky than commodity crops. They tend to have better water access, are better insulated from crop price volatility, are less dependent on government subsidies and tariffs for protection, have lower storage costs, and have higher rental rates.
The REIT's focus on fresh produce has paid off for investors. Gladstone has made monthly dividend payments consistently since its initial public offering (IPO) in 2013 and has increased its dividend payment 35 times over the past 39 quarters (as of late 2024), driven by higher lease revenue and its ability to acquire new farms. Gladstone targets its dividend growth to exceed inflation.
Farmland Partners owned or managed 180,000 acres of farmland in 17 states as of late 2024. More than 100 tenants produced 26 crop types at its leased farms.
Roughly 70% of this REIT's portfolio by value were farms growing commodity crops such as corn, soybeans, wheat, rice, and cotton. The other 30% included farms growing specialty crops such as citrus and other fruit trees. Farmland Partners receives fixed rental payments and variable payments. Its focus on commodity crops provides investors with exposure to increasing global food demand.
In addition to owning farmland, this REIT provides auction, brokerage, third-party farm management, and third-party asset management services. Additionally, it generates income from solar and wind energy, plus recreational rents, crop sales, and crop insurance from the farms it operates.
Farmland Partners acquires farms based on their agricultural value and uses alone. However, some farms have higher and better uses, such as for real estate development or renewable energy. The company has started working with renewable energy developers to turn some land into solar or wind farms. Because solar displaces a large amount of agricultural land, the properties no longer earn farm rent, but they generate three times more revenue than farm leases. Meanwhile, its farms also support wind projects that generate additional income since wind turbines displace only a small amount of agricultural land.
Farmland REITs enable anyone to harvest the benefits of investing in farmland. Historically, the sector has been an excellent investment by delivering attractive total returns from rental income and value appreciation. On top of that, farmland is an excellent inflation hedge and is uncorrelated with the markets. These features make it an ideal complement to a diversified portfolio.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
