I Just Can't Love Gladstone Land: A Closer Look at a Farm REIT

Farm real estate investment trusts (REITs) like Gladstone Land (LAND -1.21%) have gained attention for their unique focus on farmland. However, despite the allure of this niche investment, I find myself unable to fully embrace...

Farm real estate investment trusts (REITs) like Gladstone Land (LAND -1.21%) have gained attention for their unique focus on farmland. However, despite the allure of this niche investment, I find myself unable to fully embrace Gladstone Land as a viable option for my portfolio. Here's why I believe it may be more prudent to keep Gladstone Land on your watch list rather than your buy list.

Why farmland can be a good investment

It's no secret that farmland is an essential component of meeting our basic need for food. Gladstone Land, along with Farmland Partners (FPI -0.45%), provides investors with an opportunity to invest in this sector. However, for more conservative investors, Farmland Partners may not be the best choice due to a dividend cut resulting from a fight with a short-seller. Despite the short-seller admitting their claims were unfounded, the company is still entangled in lawsuits. These legal battles can create uncertainty, especially for a smaller company like Farmland Partners.

On the other hand, Gladstone Land focuses solely on farmland ownership, making it a potentially better option for those looking to invest in land. However, it is crucial to understand the unique nature of farm leases, which often include percentage of sales payments. This can create inconsistent rent collections in an inherently seasonal industry, making it challenging to evaluate performance and dividend coverage.

Different types of farms and the big picture

Gladstone Land's strategic focus lies in fresh produce, fruits, and nuts, which are more locally-oriented and less affected by commodity price fluctuations than the grain-focused portfolio of Farmland Partners. Additionally, it's important to consider the bigger picture. Despite the global population's steady increase, farmland has been converted for other purposes, resulting in a decline in farmland per capita from 1.1 acres in 1960 to just 0.5 acres in 2020. This scarcity is expected to drive up the value of farmland over time.

The problem with Gladstone Land

While there are appealing aspects to farmland as an investment, there are notable downsides that prevent me from embracing Gladstone Land wholeheartedly. Firstly, the REIT's dividend yield is relatively low, standing at around 1.8% compared to the average REIT yield of approximately 2.2%. There are other dividend options available that offer more attractive yields, such as Realty Income with a yield of 4.4% and Federal Realty with a yield of 3.5%.

As a REIT, Gladstone Land is required to distribute 90% of its taxable earnings as dividends. Despite this obligation, the REIT's yield remains near historic lows. The significant increase in stock price since the start of 2020 has inflated the valuation, leaving the stock overpriced. As someone with a value bias, this further discourages me from considering Gladstone Land as a viable investment option.

LAND Chart LAND data by YCharts

Furthermore, although Gladstone Land's dividend has seen steady growth since it was reset in 2017, this growth does not sufficiently offset the valuation issue. Compared to other growth-oriented REITs like Prologis and Innovative Industrial Properties, Gladstone Land's dividend growth falls short. Over the past five years, both higher-yielding names, Realty Income and Federal Realty, have provided better dividend growth.

Watching and waiting for the right opportunity

Considering its low yield, high valuation, and relatively modest dividend growth, I am hesitant to invest in Gladstone Land at this time. While I appreciate the REIT's focus on farmland and the fundamental appeal of the agricultural sector, I believe it is best to keep Gladstone Land on my wish list for now. I hope that the market eventually presents an opportunity where the stock is undervalued, allowing me to enter at a more favorable price.