Well-to-do investors plow cash into Canadian farmland
‘When we get calls from investors, they are looking for diversification and stability,’ says Joelle Faulkner, chief executive officer of Area One Farms, which uses a partnership model to invest in farmland. (Photo: Globe and Mail)
Globe and Mail | 13 September 2017
Well-to-do investors plow cash into Canadian farmland
by DIANNE MALEY
After years of hard work, you've sold your business and are looking to invest for the long term. You have a solid portfolio of stocks and bonds, but you'd like to add something a little different.
Perhaps you've dreamed of being a gentleman farmer, or you just like real estate. Either way, consider farmland.
It's not without risk – and you likely won't be able to ride a tractor and get your hands dirty – but farmland has proved to be an appealing portfolio diversifier over the years.
"When we get calls from investors, they are looking for diversification and stability," says Joelle Faulkner, chief executive officer of Area One Farms, a Toronto-based private equity firm. "A pretty significant number of them have run their own business and understand the value of having a local partner."
They also understand land. "They're people who like real estate."
Over the past 50 years, farmland has risen in value by 7 per cent a year on average, says Ms. Faulkner, a lawyer and engineer who co-founded Area One Farms with her brother Benji Faulkner in 2012. Area One Farms uses a partnership model in which investors and farmers both put up money to acquire properties in which they will be co-owners. At the end of 10 years, the properties are sold, ideally to the farmers, investors are paid out and the fund is wound up.
While Area One Farms has no partnerships open to investors at the moment, it "likely" will start another fund next year, Ms. Faulkner says. Participation is limited to institutional investors and high-net-worth accredited investors – people with substantial income and assets. Rules vary from province to province.
Area One's first fund is in its fifth year, with another five years to go, while its newest one is in Year 2. The firm is targeting returns of 12 to 14 per cent a year, with 3 to 5 per cent projected to come from net farm operating income and the rest from land price appreciation.
Does the prospect of tying up their money for 10 years deter some investors?
"Yep," Ms. Faulkner says flatly. "We had to make a decision right at the beginning whether we could make a partnership structure that would let us work with the best farmers," she adds. "We had to give them the kind of security they needed to want to work with us. We did it because we think the best farmers create a lot of value."
Stephen Johnston, founder of Calgary-based Agcapita Partners LP, does things a little differently.
His Farmland Funds own the land outright and charge the farmers rent upfront each spring so investors are not exposed to operating risks such as drought, flooding or crop failure, Mr. Johnston says. Unlike Area One Farms, Agcapita does not take on debt to expand its holdings.
"We don't use leverage. We want to capture farmland returns in the least volatile way possible," Mr. Johnston says.
Agcapita investors commit for five years. The company has already exited from its first two funds, which produced attractive returns. Its sixth fund, the Agcapita Farmland Fund VI, is still open to new investors who qualify as accredited under provincial securities rules. Sixty-five per cent of the firm's capital comes from institutional investors such as family offices, wealth-management firms for high-net-worth investors.
"We're one of the few who have gone through a full life cycle," Mr. Johnston says. "We've started, acquired, managed and exited, generating net returns to investors of 12 per cent a year." Most of the return came from land-price appreciation, with only about two percentage points from net rentals.
Why farmland rather than, say, an office REIT?
Because Canadian farmland represents good value, Mr. Johnston says. It is trading at a discount to global farmland based on a measure he likens to a price/earnings ratio on a company's stock: productivity cost, or U.S. dollars per tonne of wheat produced. Global farmland costs $2,780 per tonne, Canadian farmland $1,850.
At the same time, the risk-adjusted return is higher. Farmland has generated much higher returns than the stock market with less volatility, Mr. Johnston says.
But that's not a guarantee, he notes. Indeed, farmland has occasionally fallen in value. Over the past 60 years, Canadian farmland has had seven down years, he says. That compares with about 15 for the stock market.
In Ontario, finding attractively priced farmland can be challenging, which is why Area One Farms focuses on making the land it has more productive and even buying and reclaiming land that may not have been farmed for years, Ms. Faulkner says. For example, it has been finding good value in Ontario in the New Liskeard area northeast of Sudbury, and around Rainy River. "It's mostly in the Canadian Shield," Ms. Faulkner says. "Those clay belts end up being really good soil."
Like any alternative investment, buying farmland comes with hefty fees. Area One Farms charges an annual 1.5 per cent a year on invested capital (debt and equity at cost).
As well, Area One charges a performance fee of 20 per cent if and when the property is sold at a profit and investors have netted what is known as a "hurdle rate" of 8 per cent a year. "If you don't make that, then you get everything and I get nothing," Ms. Faulkner says.
Agcapita charges a management fee of 2 per cent, which comes out of rental income, plus a performance fee of 20 per cent when the property is sold. It has a 5-per-cent hurdle rate for institutional investors but none for retail.
If agriculture funds are still relatively small in Canada, it may be because of their lack of liquidity, the difficulty in explaining the concept and the dearth of representation by investment advisers at the major brokerage firms.
"Because we spend a lot of money managing and improving our farmland, we don't have a lot of money to pay brokers," Ms. Faulkner says. Agcapita, in contrast, does work through investment advisors.
Some advisors are less than enthusiastic.
Says Craig Machel, a portfolio manager at Richardson GMP who specializes in alternative investments: "It's not that I don't like [agricultural funds], although maybe that is the case because the strategies I have seen are not so private-client-friendly, in my view. The lockups are too long, the gains are not that compelling and the risks are a bit high and beyond our control."
At Area One Farms, "the tricky part is we don't have actual returns yet, because we haven't sold anything," Ms. Faulkner says. "We're targeting 12 to 14 per cent a year but we have to sell" to achieve that.
While Agcapita may be the more conservative fund manager, Area One Farms seems to capture the imagination of investors who have been "hands on" all of their lives, Ms. Faulkner says.
"A quarter of our investors have been to the farm, usually after they have invested, and over half have come to meet the farmers when we have them in town."
Surveying the land you own a share of, and talking crops with your farmer partner, might just be as close to real farming as many investors care to get.
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