Yesterday American Farmland (AFCO) and Farmland Partners (FPI) made it official, as they reported that shareholders of both companies voted to approve their merger. The combination is expected to close tomorrow, and the resulting entity will be the largest publicly traded farmland REIT in the U.S.
Terms of the deal, which was announced last Sept. 12, called for the exchange of 0.7417 shares of FPI for each share of AFCO. On that date, shares of FPI fell 19% while AFCO gained 6.5%; closing prices of $10.42, and $7.17, respectively, indicated a 7.8% discount to FPI shares for those purchasing AFCO. While merger arbitrage via shorting FPI and purchasing AFCO was possible, given the size of FPI's float it was not easy or cheap to source FPI shares. The implied "discount" continued to fluctuate, eclipsing 15% in mid-November. That gap not surprisingly narrowed considerably as the shareholder vote approached and is now all but closed.
As a current FPI shareholder and unabashed fan of companies owning land, I took advantage of the discount as a cheaper way to increase my stake in FPI. There was no guarantee that the merger would close, so there was risk in this trade, which was done in November when the level of the discount suggested that investors had doubts as to whether the deal would be consummated.
The merged company, which will continue to trade under FPI, encompasses 144,000 acres in 16 states. For perspective, that's the equivalent of 225 square miles of land, or more than three times the size of Washington, D.C. Three-quarters of the land is used for row crops, while the rest is dedicated to fruits and vegetables. Adding AFCO's land to the mix will bring some geographical and crop diversity to the company, adding California farmland with crops that include pistachios, wine grapes, avocados, walnuts and lemons.
Management expects there will be some synergies and cost savings in combining the entities. In addition, given AFCO's higher-margin crops, expectations are that the deal will be accretive to earnings this year. Time will tell.
I consider farmland to be a compelling asset class and own a handful of names that have exposure, including Limoneira (LMNR) and high-quality pink sheet name JG Boswell (BWEL) . However, the asset class has had the specter of being bid up over the past several years as the idea of owning exposure became more mainstream. To that end, this is a long-term play, in my view. I don't expect a steady road higher, but instead intend to continue reinvesting FPI dividends (current yield 4.5%) back into the stock to slowly and steadily build exposure.
Call me in 15 years, an eternity for many investors. I'll let you know how things went.