Publicly traded farmland fund Farmland Partners Inc. (NYSEMKT:FPI), Westminster, Colo., has entered into an agreement to acquire eight row-crop farms in North Carolina, South Carolina, and Virginia totaling 15,042 acres for an estimated average $5,565/acre or $83.65 million, according to a regulatory filing.
The sale agreement includes a combination of $49.8 million in cash, 824,398 shares of the company’s common stock valued at $9,356,917 based on FPI’s trading price of $11.35 on 3/24/15, and 2,157,573 units of limited partnership interests in Farmland Partners Operating Partnership which we value at $24,488,454.
Farmland Partners expects the sale to close in May 2015. Upon closing, the initial three-year flat lease rate will be $4,312,189 annually, suggesting a 5.2% income yield. It is telling that FPI apparently sees the risk of lower crop rents sufficiently significant that it intends to lock in minor 2% annual rental rate increases—even with the Fed’s annual inflation rate target—in 2018 and 2019 on this property, as opposed to waiting to negotiate new rates when the flat lease rate—equivalent to an average $287 per acre—expires in 2017.
The purchase can be terminated if the market price of Farmland Partners’ common stock falls outside a range set in the purchase agreement. Additionally, the seller has an unusual option to repurchase the property after five years for total sum of: 27.63% above the original purchase price, 10% times the cost of any farm improvements, and 15 times the annual rental income in excess of $4,150,000.
While this pending deal will help address this fund’s significant structural conflicts of interest—namely that at its IPO, more than 90% of the company’s rent revenues were tied to property Farmland Partners’ organizers CEO Paul Pittman and consultant Jesse Hough sold to the fund and then leased back to entities they control. This financial conflict endures: At the close of 2014, 31% of Farmland Partners’ 2015 contractual rent comes from land leased to entities controlled by Messrs. Pittman and Hough. ■
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