There Will Come A Time When Gladstone Land Will Be A Prime ‘Purchase’ (NASDAQ:LAND)

Writer’s Observe: This text was printed on iREIT on Alpha in late March of 2023.

Pricey subscribers,

Ah, farmland. I am undecided what number of of you’re raised within the countryside versus city sprawl, however my first 20 years of life (first 6 in a metropolis in Germany) have been spent residing in a village with lower than 30 inhabitants which had a number of issues in abundance – particularly farmland and cows.

It isn’t one thing individuals can normally inform simply, however I am a “farm child”. So with regards to the significance and the know-how of farming and what places meals on the desk, it is truly one thing I ought to have been writing extra about earlier – seeing that I truly know one thing about it.

Farmland is essential as a result of farmers and farming present a lot of the meals or components for the meals we eat. So when wanting into REITs for the primary time a number of years in the past, and noticing that there have been farmland REITs, I took be aware and made a be aware to examine them out later.

Right here I will provide you with a little bit of a deep-dive on one of many bigger and extra undervalued ones – Gladstone Land (NASDAQ:LAND).

What’s Gladstone Land?

Gladstone Land, or LAND, is a REIT that operates practically 170 farms that whole 116,000 acres of farmland, in addition to 45,000 acre-feet of banked water in California. This land has an approximate valuation of $1.6B, and is leased at 100% with no lack of occupancy. The truth that Gladstone Land presently trades at a market capitalization of $537M signifies that the corporate’s shares are valued lower than the estimated worth of the land the REIT owns.

That is a very good place to begin.

The corporate’s enterprise thought is the leasing of farmland and associated amenities to high-quality/succesful farmers on a triple-net lease foundation, combining the benefits of triple-net lease with a extremely excellent type of enterprise space – farming.

Gladstone invests in farmland that can be utilized primarily to develop fruits, greens, and nuts – very primary foodstuffs. It is one in all solely 4 corporationsthat is managed by an SEC-registered funding advisor with $4B AUM and 75 professionals educated within the subject.

The corporate’s focus has major and tertiary traits.

Not like a lot farmland you examine, the corporate’s acres sometimes aren’t used to supply commoditized crops, akin to wheat/soy/corn, however as a substitute, everlasting crops and contemporary produce – these have increased profitability, expertise much less volatility in pricing, aren’t as depending on authorities subsidies, have decrease storage prices (decrease bodily quantity), and the developments are sometimes nearer to city inhabitants facilities.

These are distinct benefits.

One of many good issues about Farmland is that there’s a finite quantity. You possibly can’t actually create extra acreage of the earth than our planet has, and the acres per capita of arable land has been declining massively for 40 years, whereas the world’s inhabitants has been considerably growing.

Moreover, farmland is an asset class that has seen a really low correlation to different asset lessons and has decrease general volatility than nearly every part in the marketplace – excluding bonds, that are decrease. This lack of volatility is without doubt one of the major drivers for curiosity in farmland investing.

The worth accessible to the corporate and its farms is important, provided that the corporate works not solely in short-lived however in long-lived/everlasting crops, in addition to grain and different crops.

The CPI for contemporary produce continues to considerably outpace all different areas in meals, together with inflation/meals and drinks by an element of 1.5x. The corporate’s farms are positioned principally near the coasts, in Colorado and Texas, however the REIT has illustration in a major variety of states throughout the nation.

Listed below are some examples.

Moreover, LAND goes into a really fragmented trade, which is at all times a bonus, the place a farmland quantity valued at $2.9T for the US continues to be greater than 86% in household possession. About 62% of the operators are over 55 years, and the common is 58 – there may be potential for a lot extra change right here, and LAND targets precisely these family-owned farms.

They purchase them at $2-$50M and in addition provide sale-leaseback alternatives for the farmer and are additionally capable of provide purchases of shares of the working partnership.

Regardless of the present downturn, the corporate’s observe file is nothing in need of staggering since its IPO in 2013.

And in contrast to different areas, AFFO per share has been rising, OCF has been rising, and the lease income has greater than 10x’ed within the time since IPO. Distribution development since 2018 has been muted – both 1% or lower than 1%. The corporate can be a month-to-month payorwhich is price noting.

LAND has a really sturdy historical past of being massively overvalued relative to its earnings potential. This, I imagine, has to do with the notion of farmland – however it’s by no means a premium I’ve subscribed to for any firm, and I do not do for this one both.

When stripping away the premium from LAND, the corporate seems fairly glorious. It has one of many higher margins within the trade and has averaged spectacular development charges general, however extra importantly, many of the KPIs I observe associated to FFO, AFFO, EBITDA, and return metrics are exhibiting glorious tendencies. It has good debt maturities and lease expirations. Not more than 15% of the excellent principal funds are due previous to 2025, and nearly 70% aren’t till 2028 or later. The corporate additionally gives analysts pretty easy accessibility to its fair-value numbers, which replace the valuations on a quarterly foundation.

The principle problem that I see with all views on the corporate is that they’re based mostly on the huge premiums that the corporate has been buying and selling at since on the very least 2021, and till fairly not too long ago. Whereas the corporate does include development potential and I do imagine it gives compelling worth for what’s on provide right here by way of fundamentals and profitability, I do imagine this valuation has been grossly overstated traditionally.

The proof I provide for this, other than stating valuations, forecasts, and different issues within the subsequent part, is expounded to each insider buying and selling and fund/billionaire buying and selling. I do comply with many of those, and I began in 2023 (since February) to incorporate extra of those tendencies.

I do not imagine they on their very own make for a “BUY” or a “SELL”, however I do imagine they will provide conviction/affirmation to an present thesis. My thesis is that since 2020 the corporate has been too costly.

That is insider buying and selling exercise.

I can level to the identical tendencies with regards to billionaires and funds shopping for exercise, all of which volume-wise tilted extra in direction of promoting than shopping for in comparison with the 2014-2020 interval. Once more, this in itself doesn’t make a thesis – but it surely reinforces my level that LAND has been overvalued for a while – and those who work with it know this properly.

Then once more, insiders additionally have not been promoting close to the height, so there may be that.

Concluding, I do not see any specific problem with the corporate’s enterprise mannequin, underwriting, margins, its returns, its dividends or the protection for them, its development potential, or among the ratios. A overwhelming majority of those are pointing in the precise path – so too are the metrics pointing to valuation, which is pure given the final 2 years of share value improvement. The corporate’s numerous KPI’s and metrics are literally, most of them, enhancing on a historic foundation. Debt metrics are down, curiosity protection is up, and foundational, that is a formidable enterprise.

I simply do not see myself paying 25-30x P/FFO for the enterprise – and that is the place my principal disagreement has been with the general thesis.-

Gladstone Land Valuation

So, as talked about – the corporate’s premium that we have seen develop from 2020 and ahead, and that has been slowly expiring, is – as I see it – a non-recurring and “incorrect” type of overvaluation. Congratulations to everybody that held on and managed to rotate out a major revenue. As I see it although, the corporate is just not price its premium – or something near it.

32x P/FFO is just not legitimate. In truth, something above 22-24x P/FFO provided that it is a firm that grows not more than mid-range single digits per yr in FFO, is simply too exuberant.

Primarily based on a 20-24x P/FFO vary, which is the place I imagine the corporate ought to be buying and selling long-term with a 5.5% FFO development estimate till 2025E (That is annual, not whole), I see an upside of round 8-13% annualized, with a yield of as much as 3.5-4% within the meantime.

That is considerably under the corporate’s general PT that we have seen over the previous few years from different analysts. In truth, imagine that when this firm hits over $20/share, you have to be extraordinarily cautious shopping for this firm. Many of the different valuation indications that I comply with affirm this view. PS values and projected FCF name for value ranges (together with tangible BV) starting from $18-$20.5. The S&P World common truly goes to $25.17, from 6 analysts having between $21-$36 – I imagine this to be too optimistic, regardless of the character of the corporate that we’re right here.

Ultimately, it is about development charges and conservative values – and I do not see that Gladstone Land gives the type of huge upside that may justify a 25x P/FFO or above a number of. At iREIT on Alpha, now we have a $25 “BUY BELOW” and trim at $27.5. I’d say it is time to trim at $23 and purchase under $20.

That makes this firm probably fascinating right here. A part of its drawback can be the truth that its market cap/measurement is comparatively small. Nevertheless it’s one of many only a few farmland REITs, and its operational security is, as I view it and analyze it, top-notch.

LAND is more likely to decelerate by way of pure development as a result of general rising rates of interest – however the distribution of three.5%, paid month-to-month, is sustainable, and based mostly on crucial type of operations of future-proof property.

This, to me, is fascinating.

As of proper now, we’re lastly in a scenario the place the corporate may be stated to be “not costly” – which it has been for years if we glance again.

That is sufficient for me to provoke a bullish thesis on this firm – regardless of it being a “Spec BUY” – and I’d begin slowly accumulating shares of qualitative farmland right here. If we ignore every part having to do with the previous couple of years of premiumization, I’d name the corporate “barely undervalued” right here, and I’d give the corporate a PT vary of $17.5-$20, coming to round $18.5/share.

This makes me maybe probably the most conservative LAND analyst on the market, however I imagine it to be truthful in context.

Thesis

• LAND is without doubt one of the extra qualitative if small, farming REITs with a formidable set of property, a very good historical past, and simply now popping out of a number of years of huge overvaluation – which I’ve not discovered significantly conducive to conservative worth investing.
• That has now modified. I now see LAND as being undervalued, if solely barely, and can be excited by beginning to accumulate shares presently.
• LAND inventory is a “BUY” and I give it a PT of $18.5/share.

Keep in mind, I am all about:

1. Shopping for undervalued – even when that undervaluation is slight, and never mind-numbingly huge – corporations at a reduction, permitting them to normalize over time and harvesting capital features and dividends within the meantime.

2. If the corporate goes properly past normalization and goes into overvaluation, I harvest features and rotate my place into different undervalued shares, repeating #1.

3. If the corporate would not go into overvaluation, however hovers inside a good worth, or goes again all the way down to undervaluation, I purchase extra as time permits.

4. I reinvest proceeds from dividends, financial savings from work, or different money inflows as laid out in #1.

Listed below are my standards and the way the corporate fulfills them (italicized).

• This firm is general qualitative.
• This firm is basically protected/conservative & well-run.
• This firm pays a well-covered dividend.
• This firm is presently low cost.
• This firm has a sensible upside based mostly on earnings development or a number of enlargement/reversion.

I will not name it low cost, however I’ll name it pretty valued right here. That makes it a “BUY”.