Published by Bob Ciura on September 12th, 2017
Gladstone Land Corporation (LAND) is a Real Estate Investment Trust. REITs are popular investments because they typically pay high dividend yields. LAND is one of 171 REITs in the Sure Dividend database. You can see all 171 REITs here.
LAND has an attractive dividend yield of 4.2%, which is roughly double the average yield of the S&P 500 Index. And, LAND pays its dividends each month, rather than each quarter. Sure Dividend has compiled a list of stocks that pay monthly dividends. You can see the entire list of all 37 monthly dividend stocks here.
LAND is a unique REIT. Whereas most REITs own physical buildings across various industries like retail or healthcare, LAND owns farmland, as well as vineyards.
This article will discuss LAND and why it could be a valuable stock for diversification and dividend income.
LAND invests in farmland and farm-related properties in the U.S. Its property portfolio currently includes 72 farms, encompassing over 61,000 acres in 9 different U.S. states. The reported value of the portfolio is approximately $531 million.
LAND typically purchases properties and leases them back to farmers, known as sale-leaseback transactions. Many of its leases are triple-net, meaning LAND receives a steady stream of rental income, while the tenants are also responsible for real estate taxes, insurance, and maintenance expenses.
Some of LAND’s leases also include a revenue-sharing component, based on the crops harvested on the farms.
U.S. farmland has proven to be a very strong investment over many years, characterized by stronger returns and lower volatility than other real estate investments, and the S&P 500 Index.
Source: June 2017 Investor Presentation, page 6
LAND’s operating strategy is to own farmland in three categories: produce, nuts, and grains. According to the company, produce and permanent crops are more profitable than commodity crops, because they yield higher rental incomes, exhibit less price volatility, and have lower storage costs.
As a result, LAND generates lots of cash flow, which allows it to pay dividends to shareholders. Funds From Operation, a non-GAAP measure of cash flow, increased 24% in 2016. On an adjusted basis, FFO-per-share increased 36% to $0.541.
Growth was due primarily to a 35% increase in number of farms owned. Occupancy stood at 100% in 2016, which indicates a strong property portfolio.
LAND has positive growth prospects, because it stands to capitalize on two major long-term trends. First, is growth of the global population.
The world population recently surpassed 7 billion, and is expected to eclipse 9 billion by 2050. Adding two billion more people to the Earth over the next 33 years will likely place enormous pressure on farmers to grow more food.
At the same time, there is only so much land for farming. In fact, the supply of available farmland is actually decreasing in the U.S., as large amounts of farmland are converted to suburban use each year, for things like housing, schools, and offices.
Source: June 2017 Investor Presentation, page 5
The combination of falling supply and increasing demand has caused farmland prices to rise steadily for many years. As the supply and demand trends are not expected to reverse any time soon, LAND has a strong future growth outlook.
Future growth will be achieved through growth at existing properties, and by investing in new properties.
LAND makes frequent acquisitions to grow its investment portfolio. A few of its property acquisitions over the past few months include:
- July 17th acquisition of four pistachio and almond farms in California for $13.6 million
- August 9th acquisition of a 1,910-acre vegetable farm in Florida for $9.7 million
- September 5th acquisition of a 361-acre vineyard in California for $5.4 million
- September 11th acquisition of a 746-acre organic farm in Washington for $9.5 million
There is plenty of room for future M&A activity.
Source: June 2017 Investor Presentation, page 15
The U.S. farmland industry is highly fragmented, with significant family ownership. This means the environment for continued acquisitions remains fertile for LAND.
Thanks to acquisitions, LAND is off to a good start to 2017. Adjusted FFO-per-share increased 1% in the first quarter, and 1.7% in the second quarter, due to higher rental income from recent acquisitions.
Valuation & Expected Total Returns
In the past four quarters, LAND generated adjusted FFO-per-share of $0.561. As a result, the stock trades for a price-to-FFO ratio of 22.7. The stock does not seem to be undervalued.
That said, it is a high-quality business that investors should expect to trade for a premium valuation multiple. On a per-share basis, the company had an estimated net asset value of $14.46 per share last quarter.
This means LAND trades at a slight discount to its NAV, of about 12%.
Going forward, future returns will be generated by FFO growth and dividends. A potential breakdown of future returns is as follows:
- 4%-6% FFO growth
- 4% dividend yield
Long-term FFO growth of 4%-6% is attainable for LAND. Growth over the first two quarters of 2017 has hovered around 1%, but LAND is coming off a very good year in 2016.
In addition to FFO growth, investors will collect a 4.2% dividend yield, based on the current share price and dividend payout. As a result, total returns could reach 8%-10% annualized.
Not surprisingly, LAND’s dividends will make up a significant portion of total future returns. This is fairly typical for a REIT.
LAND currently pays a monthly dividend of $0.044 per share. The annualized payout of $0.528 per share, represents a current dividend yield of 4.2%.
LAND has a good dividend track record. Since it went public in January 2013, it has paid over 50 consecutive monthly dividends to shareholders. It has also increased its dividend seven times.
Source: June 2017 Investor Presentation, page 18
Monthly dividends from the last quarter were up 1% from the same three-month period last year.
The dividend appears secure. LAND had adjusted FFO-per-share of $0.561 over the past four quarters, compared with the current annualized dividend payout of $0.528. This results in a trailing FFO payout ratio of 94%.
LAND’s payout ratio is high, at almost 100% of FFO. The dividend does not have much room for error. A significant decrease in FFO could endanger the dividend.
However, LAND has positive long-term growth potential, thanks to the strong economics of U.S. farmland. If FFO continues to grow, the dividend would be sustainable.
The rising global population and falling supply of available farmland in the U.S., sets up a very profitable future for LAND. Supply and demand factors support continued farmland investment.
LAND pays an attractive dividend yield of 4.2%, with the potential for dividend increases each year at a rate above inflation.
As a result, LAND is a worthwhile addition to an income-focused portfolio, for diversification and dividend income.