Episode 63: Farmland as an Asset Class | Guests Drew Lipke and Rob Moore from AcreTrader
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Welcome to the REALTORS® Land Institute Podcast, the Voice of land, the industry's leading land real estate organization.
Justin Osborn: Welcome to the Realtors Land Institute Podcast, the Voice of Land, the industry's leading land real estate organization. This is Justin Osborn, ALC with the Wells Group in Durango, Colorado. On today's episode of the Voices of Land podcast, we're gonna talk about farmland as an asset class. Before we start, please know that the investment information you'll hear today is the expertise of our guests. As always, the views and opinions expressed on the podcast are those of the speakers. RLI does not give financial advice. RLI advises you to do your own research and consult with your financial advisor before making any investment decisions. With that in mind, let's introduce our guests, Rob Moore and Drew Lipke of AcreTrader, an online platform that simplifies farmland investing. Rob serves as the General Manager of AcreTrader, having previously held roles as the Director of Farm Operations, Investment Manager, and Investment Analyst specializing in row crop farm sourcing and acquisition. Prior to joining AcreTrader, he worked as a senior analyst for a forensic accounting firm in the waste and recycling industry, preceded by full-time work in livestock operations and real estate management. Welcome to the podcast, Rob.
Rob Moore: I really appreciate it, Justin. For our disclaimer, I'll rip through quickly to state that all information we discuss is for informational and educational purposes only. While it may not reflect the views of Proterra or AcreTrader, our comments today should not be interpreted as recommendations to buy or sell and does not constitute financial, investment, tax, or legal advice. As you said, you should always consult with your personal professional advisors before making any investment decision, and any examples or past performance are not guarantees of future results, which may vary, including possibility of loss. With all that said, we're really happy to be here with you.
JO: Well, thanks for throwing that out. And next up, we have Drew Lipke. Drew joined AcreTrader in 2021 and serves as Managing Director. He leads the sourcing and underwriting for farms purchased and managed by AcreTrader LLC. Drew grew up in Little Rock, Arkansas and owned farmland in Arkansas for over a decade. Prior to joining AcreTrader, Drew spent 14 years in various roles in debt and equity capital markets. He served as Managing Director of Corporate Credit Analysis for fixed income broker-dealers and spent 12 years at Stephens Inc. with roles in equity research covering building materials and construction services, aerospace and defense, and energy exploration and production, as well as institutional equity sales. Welcome to the podcast, Drew.
Drew Lipke: Thanks for having us here, Justin.
JO: Yeah, I'm excited for our listeners to learn more about AcreTrader and what it is you guys are doing with farmland. So give me the quick 101 version, if you will.
DL: Yeah. Basically, we make farmland as an asset class accessible and easy for high-net-worth and individual investors. We've done this for the last eight years now across about 150 farms representing 17 states and about 35,000 acres across the country. And our role is to make sure that we're buying what we consider to be investment-grade farmland, make sure we're buying it at the right price, and then making sure we manage that land appropriately and then find outcomes for investors to deliver targeted returns. Simple as that.
JO: Gotcha. Okay. So that's basically portfolios that clients are parking money into and then they're not having to deal with the management side of things. Is it fair to say that they're sitting back and enjoying mailbox money?
DL: Yeah. So I think there's ultimately three ways to invest, but the goal is always to make it passive. So you're right from the sense that the investor is not actively a part of the management of the farm. Traditionally speaking, the most common way that people have invested with us is fractionally. So where, if you think about, typically you need, let's call it a couple million dollars to buy a high-quality farm here in the states, our minimum investment size for fractional investing is about $15,000. So you can put a small amount of money into a single farm. You're then grouped with a whole bunch of other investors that receive passive income and then the long-term appreciation from that land value. We have a fund product if you want to invest one time and get a lot of different assets together so you have a lot more diversification. We do have a fund product, and then we do also work with whole farm buyers. So there's a certain percentage of our investors that they want a little bit more control. Maybe they're looking for something specific to a location or a crop type that they're particularly interested in. And again, they're looking to deploy a million or more dollars in one slug. We do that as well. But ultimately our goal as an organization is to make it turnkey. So we're out working directly with the farmers, land managers, brokers to source the deals. We do all of the legal paperwork. We make sure that if they're looking to do a 1031 transaction or something else, that we facilitate and help with that side. And then ultimately are doing all of the management and reporting on an annual basis.
JO: And are most of these gonna be dryland farms, irrigated farms, or does it just kind of matter depending on where it's at in the country?
DL: Yeah. It depends on, we go back to this investment-grade farmland. So we have core regions that we like to operate in. So if you think about our portfolio, it's about 40% in the Corn Belt and that's gonna be predominantly dryland farms. We've got about 20% in the Mississippi Delta. That's gonna be all leveled and irrigated ground. We've got about 15% in the Pacific Northwest. And again, that's gonna be irrigated ground. And as you go west of the 100th meridian, water is critical. That's a fundamental component of our underwriting and valuation work and making sure that we're only buying high-priority sustainable water rights with any investment that we make out west. And then we also have investments across the coastal plains, which would be Georgia and the Carolinas, and then also up in the Lake States. So we have these core regions that we like to operate in where we feel like there is a thriving agricultural community with a lot of professional operators who are always looking to actively lease more ground.
JO: Okay, great. Well, I love that it's diversified. And so hypothetical example, let's say I had a client that said, "Alright, we got $100,000, we're gonna park it with you guys." Is that seeing dividends paid out every quarter? Is it seeing stuff paid out every year? Does it sit in a fund and just generate a 4% to 5% return? Talk to me a little bit about that.
RM: Yeah, so the return profile is typically gonna be an annual distribution. Right? We're getting rent paid once per year, so you're gonna receive one distribution per year from the rent to the farmer. We do sometimes have flex leases, so particularly in the Midwest, there may be an additional distribution after the harvest season depending on yields and commodity prices locally. In the fund, it's functionally the same. It's just a larger basket of assets, so then there's more diversification rather than investing in one specific farm. But traditionally speaking, you're gonna see one cash distribution per year. And then ultimately we're looking to manage that farm for a set amount of time. We typically look for about the three to seven-year timeframe. We typically market up to a 10-year hold period per farm. We do want investors to think about this as largely illiquid, so it's something that you set and forget. This is your capital preservation money. That said, the majority of the return comes at the point of exit. So historically, the thesis that we have invested upon is the long-term appreciation of farmland values due to the reduction in supply. We lose about 4.8 acres of farmable ground in the United States every minute. And as a result of that, you have this constantly shrinking supply. Most of that again is neighborhoods and buildings and businesses.
RM: So as we lose farmland in the United States, at the same time, the global demand for food, fuel, and fiber that we produce at a better rate than just about anywhere in the world is increasing. That's led to a pretty consistent, let's call it 5% to 7% annualized appreciation rate for farmland over the last 30 years. So ultimately, this is a buy and hold strategy. That cash flow comes once a year. Typically speaking, 2% to 4% is what you should expect from high-quality row crop farm ground. And then the return is largely centered around the exit at the end of the hold period.
JO: Man, there was a statistic there I'd never heard of that I want to go back to. Almost five acres of farmland every minute in the United States. Man, I guess it makes sense when you think about the transitional land that's happening and these farms that are being turned into Dollar Generals, Tractor Supplies, subdivisions by big volume builders. When I think about that, I guess it shouldn't surprise me as much as it does, but I've never heard that statistic before.
RM: Yeah, if you look at the USDA census data between 1997 and 2022 and look at cropland acres, you can see that we lost something like 64 million acres over that time frame. And if you do the math, that's where that number is derived from.
JO: Well, that makes sense. I mean, simple Econ 101, right? Supply and demand.
RM: And again, it's just one of those few things. There's not a lot of asset classes where you cannot generate more supply. It's very, very rare. Typically speaking, if you need more apartment complexes, you build more apartment complexes. If you need more commercial real estate, you build more commercial real estate. If you need more farmland, there's nothing you can do about it. And we're losing acreage very fast. So it does give a security to the underlying economics of the asset class that's fairly unique even within real estate.
JO: Yeah, yeah. I mean, it makes perfect sense when you really think about it. And so one of you guys a few minutes ago mentioned 1031, and that's something that I deal a whole lot of out here in Colorado and New Mexico is 1031 exchanges. So would this qualify as a 1031 exchange if I sold a relinquished property here and then rolled money into y'all's firm, or would this not qualify for a 1031?
RM: Sure. So the fractional and fund investments are not 1031 compatible. Now, in the fund, there is a potential tax benefit from Section 199A. So because it is a REIT, there is some potential tax benefit there. That said, where we work with 1031 clients is whole farm purchases. So we have, and a matter of fact, within the last six months, we have had more people reach out regarding 1031s than in any year previous in our company's history. It's a very fast-growing market. I think a lot of people right now are particularly interested in getting out of either commercial real estate or multifamily real estate. And it's not that the returns haven't been there. I think one, the volatility has been pretty high in those industries over the last five years. And two, and I hear this every single time I get a call from a 1031 individual, they're sick of managing it. It's a ton of work. And we really do, we do a lot on the management side. We take management very seriously. That said, our thesis is no toilets and no heartbeats.
RM: So this is really a conservative asset class to roll into that I think long term a lot of people are looking for a safe place to put their money. In the 1031 world in particular, a lot of people use that strategy to pass on to the next generation because of the basis reset that comes with that transition. A lot of people are looking for somewhere where they want to make sure, I want the value to appreciate. There may be less focus on the cash flow. A lot of older individuals that are moving out of a higher management strain investment property are really compelled by the farmland thesis, and we absolutely work, source, and manage 1031s in that capacity.
JO: No toilets, no heartbeats. I love it. I mean, I can just see it at like National Land Conference in Atlanta next year. You guys have your booth and there's the banner hanging over the tabletop. "Sick and tired of these? Invest with us." Like, that's genius.
RM: Yeah, and honestly, our marketing is true to the transparency that we live by. We are a boring investment, and I think that's very, very important. You need a part of your portfolio that isn't moving 30% per day. We see so much volatility in the market today, and I think it's really important, especially with an agricultural investment, to present the product transparently. This is not... We're not gonna print triple your money in two years investments. We also publish all of our historical results, and our average IRR is high single digits across that entire portfolio. So I think it's really important that you come into this asset class wide-eyed on what it is. I also think that we focus really hard on making sure you have direct access to what that portfolio should be. So we don't use leverage, we're not blending in commodities trading, we're not blending in permanent crops. We are focused on high-quality row crop real estate in an unlevered investment vehicle because we think that's the most direct way to access the fundamentals of the farmland investment thesis.
JO: Yeah, that makes sense. I mean, slow and steady kind of wins the race. So, yeah, boring investment, I think, is top of mind for a lot of people right now is just keep it slow, keep it steady. We're okay with those smaller returns as long as they're consistent. Like you said, you see a 30% turn one or two years, you might see a 40% downturn the next year. And so, man, I totally agree with that, and I like being diversified in my portfolio. So let's say that somebody invests with you. They're thinking on, "Okay, four to seven years is gonna be my hold time." Year three, life happens, they get thrown a curveball, they need to exit. Are they just hosed, or is there an exit strategy if it's not the length of that term?
RM: Yeah, I mean, they are illiquid investments, but with our fund product, the way that that is structured is that after your investment, there's a two-year, 24-month lockup period. And then after that, you can request to redeem your shares or withdraw your shares. And we have structured it where there's a fund-level gate so that no more than 5% of the net asset value of the fund can be withdrawn in any given quarter, and that's on an aggregate basis. But it is a way to have or provide managed liquidity for investors, and that's within our fund product specifically. With our direct entity investments, our fractional investing, those should be considered longer-term investments. There isn't a secondary market there, and so really the liquidity comes when the farm is ultimately sold. And again, we've shown that we can do this. 75 of the roughly 150 farms that we've funded on the platform have gone full cycle, and all capital plus appreciation plus lease income have been returned back to investors. But for those wanting more liquidity, the fund product is definitely the better answer. And then certainly with the whole farm buyer or separately managed account program that's 1031 compatible, with that structure, the investor ultimately determines the exit.
JO: And did you say it was a $15,000 minimum for investing?
RM: For the direct entity fractional investments, that is a $15,000 minimum investment, and you can increase it by $1,000 above that. For the fund product, it is a $150,000 minimum. And then just because of the simple capital that's needed to buy an entire farm, we generally like to point people to that being closer to like a million-dollar minimum, just because of the scale that is needed to purchase an entire farm as a single individual.
JO: Is it fair for me to ask, and can you discuss what the average investment from both of those are?
RM: Yeah, so I think, traditionally, investors that are coming in on the smaller $15,000 minimum product, the average investment size for us is just over triple digits. So average investment size is three to five farms, and I think $100,000 to $200,000 is a pretty standard portfolio size. That said, I think, again, we're sort of a democratic approach to this investment strategy. So we have a ton of investors that have invested one time with $15,000. To be blunt, that's a lot of money to me personally. And so I think having a percentage of your portfolio in farmland shouldn't need to be a $150,000 investment. That said, I think it's a pretty rare opportunity to be able to, with $150,000, get 10 different assets in a portfolio. Moreover, the fund ultimately invests fractionally in a whole lot of farms. And realistically, we should be putting 30 plus farms a year into that fund. So over the course of the next three to five years, you can then ultimately, with one investment, diversify across 100 plus assets.
JO: Gotcha. Okay, that makes sense. Well, yeah, this is a new world to me. So what other questions should I be asking or what other nuggets do you have to throw out there for our listeners?
DL: Yeah, you cater a lot to the agricultural brokerage world. And one thing I would say is that as much as we've spent the last eight years marketing to investors, we've also spent the last eight years marketing directly to operators. And we are very much a partner and a tool for operators across the markets where we work. And so anytime that any kind of broker has a client who's an operator who is in a position where they need to be... Want to be able to buy a farm or they need an investor to step in to buy a property, that is how we can work really well with the ag brokerage community, and we work with many today. And so we do a lot of sale-leaseback opportunities. We have a lot of instances where an operator comes to us or goes to a broker and says, "Hey, I need you to help me find an investor. My landlord's getting ready to sell this farm and I don't want to lose this from my operations." Well, that's where we could step in and we'll sign a long-term lease. We'll give operators a purchase option where if we ever decide to sell the property, they have the right to buy it back at market value. And that's been tremendously successful over the years for us. So that kind of direct sourcing from operators and trying to create a win-win solution with them has been very powerful for our sourcing, and definitely something I'd want to highlight here.
JO: Okay, so yeah, that's fair. So I guess I was kind of thinking of it from one direction, that you guys are looking for clients to give you money to invest, but there's also that other side like you just hit on with the operator side. So for our listeners that might have some of these clients with large acreage farms, then that's something that they could possibly reach out to you and see if that farm might fit into y'all's portfolio.
RM: Yeah. For us to stay in business, I think it's really important that we're finding opportunities that are a win for both sides. Right? If you build your business just benefiting one side, whether that's supply or demand, I think you're bound to be unsustainable. So we've really built the business around making sure that when we go out and buy, we are working directly with farmers. We work a lot with brokers, local land managers to make sure that it's also a win locally. So we often talk about how we're the group to call when you have the really strange opportunity that, man, you really wish you could buy this, but there's a lot of hair on it. I deal with a lot of... There's three or four siblings and they all have different demands on the PSA and there are four different close deadlines. Those are the type of opportunities that are a great chance to bring in an investor. I think if you talk to most operators, at least that I speak to, they feel like there's a lot of people in their local market that have somebody in their back pocket, whether that's a local investor, whether that's your banker, lawyer, whether that's a large institution that invests in farmland.
RM: And a lot of especially mid-sized operators feel like their growth is inhibited because they don't have somebody in their back pocket, a personal relationship to funnel money into their growth. We are completely agnostic on that front. We want to work with full-time operators. We're very picky on the type of farm that fits our buy box, but we want to work with high-quality farmers in core regions of the United States. I don't care if you're a first-generation farmer or an eighth-generation farmer. And I think that more agnostic approach to the market, where we want to find opportunities where it's a win for you and it's a win for the investor, opens up a lot of opportunity for us. I think the other plus side is we're pretty small, so you can pick up the phone and call the main line and there's a pretty good chance Drew or myself will be the ones picking it up. So it's not hard. We're not some big organization where you're working with one person and you get passed on to another person. We're pretty small and direct to customer on both fronts.
JO: And I love that. I'm a big fan of good customer service, so that means a lot to me. Well folks, if you'd like to gain more expertise in agricultural brokerage or other specialties in land real estate, consider taking a Land U course, attend a webinar or virtual roundtable, or come to an in-person RLI event like the National Land Conference or a chapter event. Registration for these courses and events can be found at rliland.com. Anything else you guys have here as we're wrapping up that you want to make sure our listeners walk away with?
RM: No, I think as far as getting a hold of us, acretrader.com is a great place to start. We have all of our direct information on there. So it's not hard to find a phone number, it's not hard to find our email addresses. Please reach out to us. I think again, we swear by the transparency and access that has driven the growth of our business so far, and we want to be a good partner in the marketplace. So if anybody's trying to get a hold of us, please reach out. We'd love to sit and talk.
JO: Excellent. Acretrader.com, that's easy enough for our listeners to find. And folks, if you want more expertise on land real estate topics, be sure to check out the RLI blog, follow us on social media, and of course, tune in for upcoming episodes of the Voices of Land podcast.
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