After a quiet year for investment company flotations last year, brokers are hoping for a livelier new issue market in 2020. One of the first to market, helped by kicking off the process in December, could be Global Sustainable Farmland Income Trust (FARM), which is looking to raise up to $300m (£230m).
The initial public offer (IPO) is open until 25 February. The starting net asset value (NAV) per share will be between 97.7 cents and 98.6 cents depending on the size of the issue (the figures are based on $100m of gross proceeds and $300m, respectively).
Readers will know I love new ideas, as long as they stack up intellectually and come with good corporate governance built in. This one I am not yet convinced about.
The business model is fairly simple. FARM will buy land and rent that out to tenant farmers, who might be individuals or companies. Most tenants will pay rent on leases subject to inflation or fixed uplifts, but the prospectus leaves room for FARM to get paid on a ‘crop share’ basis where it takes a slice of the profit once a crop has been harvested and sold. Crop share profits may be distributed as special dividends but probably not in the first couple of years of the fund’s life.
The proposed fund will be global in that it will invest in the US, Europe, Australia, New Zealand and maybe parts of central and south America, but not Russia. There will be limits on exposures designed to ensure the portfolio is diversified geographically.
The sustainable bit comes in because its farmers will be required to manage the land in accordance with ‘LEAF’, the Linking Environment and Farming’s Integrated Farm Management framework. This is not organic farming but it emphasises soil health, pest controls that have a minimal impact on the environment and human health, pollution control, animal welfare, energy efficiency, prudent water management and landscape and nature conservation.
It is a set of noble ambitions rather than hard and fast rules and looks to me as though it leaves wiggle room for US farming methods such as GM crops.
This is handy as US farmland will probably form a major part of the portfolio. There is said to be a pipeline of about $1bn of potential investments but $330m of this is described in more detail in the prospectus. There is nothing in the UK in that list and only a small amount in continental Europe. Over half is in the US and the balance is in Australia/New Zealand.
The investment sizes range from $4m to $50m. The advisers think there is a sweet spot where lot sizes are too big for individual farmers and too small for institutional investors and so prices are cheaper (but this works both ways – it may be harder to sell these assets). Prospective returns range from 5% to 20%.
The manager is Capital Advisory Partners Limited, which has been around since 2006. At the end of October 2019, it had assets under management of just $94m (yes ‘m’ not ‘bn’).
It will get a management fee worked out on a sliding scale of 1.25% on the first $200m of invested assets and 1.15% on the next $100m, falling to 1.1% on the next $200m – the scale keeps going from there. Fees on uninvested cash are 0.35%. The ongoing charges ratio is estimated to be about 1.47% for a $300m fund or 2.17% for a $100m fund.
Gearing will be fairly modest, typically around 10% of gross asset value.
That leaves shareholders with net returns of 7% to 8% a year, once fully invested.
Despite the size of the pipeline, the prospectus states that it may take nine months to get half the IPO proceeds committed and 18 months to deploy all the IPO proceeds. That limits the company’s ability to pay dividends and so these will be 2.5 cents in the first year rising to 4.25 cents for the year ending 30 September 2022.
The dividends will be declared and paid quarterly in US dollars but shareholders will be able to elect to receive sterling payments.
An ever-increasing global population and rising incomes, ought to be positive for farming incomes. Climate change, pests and diseases, decreasing soil fertility and the distortive effects of tariffs and subsidies present real problems, however.
With no experience of farmland investing to fall back on, I keep thinking back to the timber funds where fires, diseases and even volcanic emissions ate into investment returns and fluctuating world timber prices depressed values.
In theory, FARM is cushioned from the worst of this as its tenants will bear the brunt of any problem (except in crop share situations). The returns aren’t that high, however, so any shortfall in rental income will be felt keenly by investors.
From what I hear, FARM’s IPO may succeed. Investors are attracted by the diversification benefits of a whole new asset class. My inclination is to sit and watch this one for a while to see how things pan out.
James Carthew is a director at Marten & Co, operator of the QuotedData website. The views expressed in this article are his and do not constitute investment advice.