Gladstone Land & Barron’s article

We are planning an in depth post about return correlation, and why the diversification benefits of farmland are often arrived at using suspicious data. However, before that happens, here is a quick post about the reaction of one of the farmland REITs reaction to a positive news article.

There are now two publicly traded US companies who’s main business is investing in farmland. Neither do any farming, they hold farmland and lease it to farmers. Gladstone Land (NASDAQ:LAND)  became a public company in 2013 and Farmland Partners (NYSE:FPI) had its IPO in 2014 (Farmland Partners recently acquired American Farmland Company, which was another publicly traded company). Both of these companies are organized as REITs, which essentially means that by following some simple rules (like paying out 90% of their income and deriving the majority of their revenue from real estate) they are able to not pay any taxes at the corporate level. However, individual investors are taxed on the dividends at ordinary income rates rather than at the rate for qualified dividends.

Two weeks ago Barron’s came out with a positive article on LAND (unfortunately there is a paywall). There was nothing new in the article and it mainly repeated some of the company’s talking points. In a nutshell, it said that Gladstone has ‘higher quality’ land with good CAP rates and a manageable debt load. Also, they reiterated LAND’s talking point that the appraised values for their land (partially internally estimated) was well above the current share price after subtracting out the net debt. After the article was published, the stock subsequently skyrocketed. The article came out on the weekend after 8/4/2017 and the stock price increased over 10% in just a couple of days and hasn’t yet come down.

So much for stock market efficiency…In fairness on 8/8/2017 there was an earnings release, which was a day after the initial move.

One point in the article to take issue with is LAND’s ‘manageable debt load’. Management has expanded the asset base and debt load rapidly in the last few years and they are now close to 2 to 1 levered. Less than a year ago they also issued preferred shares (LANDP) because they didn’t want to sell common stock at the current market price but also didn’t want another big increase in their debt load. So while the debt may be ‘manageable’ I am not sure it is a good idea, especially considering the easy money environment we are currently in. What happens when/if that reverses?