The fact that World Wrestling Entertainment (NYSE: WWE) is a publicly traded company suggests we should never be surprised when a firm, no matter how obscure or unusual, becomes a public entity.
So it shouldn’t be too much of a shock when something as traditional and salt-of-the-earth as growing lettuce receives its own trading symbol. At the end of January, that’s exactly what happened: Gladstone Land (LAND), a company that acquires and rents out agricultural real estate, completed a $50 million IPO on the NASDAQ. What I find surprising, however, is the fact that Gladstone Land intends on converting to REIT status.
To be sure, there are already niche sectors within the REIT industry–timber, cell phone towers, and one day, perhaps, even solar energy–but a firm focused on farmland real estate (and related facilities) is a REIT type I’ve never heard of. It makes sense, though. As America’s agriculture business becomes increasingly consolidated, we can expect farmland tenants to offer greater stability through their sheer size, and because of this real estate’s function, it can feasibly withstand economic contraction better than many other asset types.
However, Seeking Alpha contributor Francis Gaskins (whose avatar shows him playing a violin, which I find endearing) warns his readers that this company’s structure and strategy make it a risky bet. He advises his readers to “pass.” Particularly disconcerting is the fact that Gladstone Land isn’t even a REIT yet; it’s only announced the possibility of REIT formation, depending upon its performance in 2013. This is how the company explains it in an SEC filing (here’s the filing, but fair warning, it’s really boring):
It is possible that our monthly distributions will not be sufficient to eliminate our non-REIT earnings and profits by Dec. 31, 2013, in which case we would likely not elect to be taxed as a REIT until our taxable year ending Dec. 31, 2014. (p 8)
Isn’t it fair to assume potential stockholders would like a definite yes or no, or an exact date, regarding the REIT thing? After all, the question of whether or not it receives this designation says a great deal about the company’s direction, future growth, and borrowing potential.
Here is how Gladstone Land Corp. describes its holdings:
Gladstone Land currently owns twelve row crop properties in California & Florida totaling 1,631 acres. All twelve farms are fully leased on a triple net basis to experienced agriculture producers. …These twelve properties are farmed for strawberries, lettuce, cabbage, radicchio, cantaloupes, watermelons, raspberries, okra, peas and grape tomatoes.
One of Mr. Gaskins’s other concerns regarding the aspiring REIT is the relatively short length of agricultural leases. The crops described above are harvested annually, making them pretty short-term (i.e., noncommittal) as produce goes. An orchard, on the other hand, requires a great deal more commitment, and I would worry that the “flexible” leasing the company offers some of its tenants threaten the stability of its assets. After all, if your only tenant’s lease was about to expire, what bank would have enough confidence to refinance your property?
This particular real estate class is incredibly complex, affected by far more variables than many other asset types. Weather conditions remain a wild card (in much of the country, at least), and food prices are liable to fluctuate, affecting tenants’ performance and growth potential.
Still, this company has the benefit of triple-net leases for its properties, a major plus for prospective investors and a sign of strength among its tenants. Plus, some analysts argue that the current outlook for commodity prices will drive up farm land rents in many parts of the country. For the sake of Gladstone Land, let’s hope that includes California and Florida.