It is not very often that I'll pass up the opportunity to buy assets at what I believe to be a discount to their true value; that's what value investing is about. However, the payoff can take years to realize, which is way too long for many investors, and that's assuming your assumptions are valid in the first place. They won't always be.
When I can get land at a discount, and farmland to boot, that's even better. I've written previously about Farmland Partners (FPI) , a real estate investment trust that acquires and manages farms. The REIT owns about 115,000 acres, or 180 square miles, of farmland in 14 states, with crops including corn, soybeans, wheat, rice and blueberries, among others. On the basis of enterprise value to acres -- a self-designed metric I use for comparative purposes -- that equates to slightly more than $3,800 per acre. FPI currently yields about 4.7%.
In September, the company announced that it would merge with American Farmland (AFCO) , which owns more than 18,000 acres in six states. Beyond corn and soybeans, AFCO also grows almonds, pistachios, wine grapes, avocados and citrus, so it will complement FPI's crop mix. In addition, it will diversify the company geographically given AFCO's presence in California, where it owns 10 farms with nearly 3,400 acres. AFCO currently trades at $11,300 on the basis of enterprise value to acres; that's much richer than FPI, but it reflects in part steeper values on California land. The combined entity will own 133,000 acres, which is the equivalent of 208 square miles, or three times the size of Washington, D.C.
Here's where things get interesting: The deal calls for the exchange of 0.7417 shares of FPI for each share of AFCO. At yesterday's closing prices of $7.26 for AFCO and $11.22 for FPI, buyers of AFCO would be receiving FPI at a 14.5% discount, assuming the deal goes through. In essence, at current prices, each share of AFCO theoretically would get you $8.32 of FPI, all else being equal. Prices no doubt will change as the closing date approaches, as will this current "discount."
This is not a short-term trade in my case; this will stand as long-term position, in which dividends will be reinvested in order to increase my piece of the farmland pie. There are those that believe that the farmland craze has overly inflated prices. Whether true or not, farmland remains an interesting asset class that should benefit over time while providing diversification benefits.