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What’s that “Top Microcap Targets 200X Potential” Stock teased by the Fool?

Checking out a "Real Assets" pitch from Everlasting Firecrackers

I don’t usually cover the same newsletter twice in a row, but after my look at the Motley Fool’s Firecrackers teaser I got a bunch of questions about a similar pitch that same newsletter made last week…. and the two stocks are about as different as could be, so I’ll give it a quick look.

Last time it was a “next Amazon” idea, this time it’s a real estate idea. Here’s a little taste of the ad from their Everlasting Firecrackers service, which focuses on building a portfolio of high-growth microcap stocks…

“Real assets, real results. This company invests in one of the most exciting real estate sectors I’ve ever seen, and the numbers bear it out – its annual occupancy since IPO in 2013 has never dipped below 99.5%. That’s rent that keeps paying. Try finding a hotel (or an office building) with those kinds of occupancy rates!”

What other clues do we get about this stock? We know it’s a “microcap,” because that’s what this newsletter focuses on — and in their terms, that means it’s got a market cap below $1 billion.

Other clues:

“1,852% growth already achieved. That’s right – since its IPO, it has already grown its holdings from $75 million to a whopping $1.4 billion.”

And…

“This company currently owns just 0.5% of its target market – 160 out of its 32,000 identified investment opportunities. That’s 20,000% potential business growth on the line. 200x potential business upside.”

So who is it? Thinkolator sez this is the smallish farmland REIT, Gladstone Land (LAND).

I’ve written about Gladstone a couple times over the years, it is a buyer of mostly “value added” farmland, more focused on fruit and vegetable production than on mass grain-growing capacity or “commodity crops” — they mostly do sale/leaseback deals with farmers who want to access some of the value of their land, or buy property that farmers have identified as attractive to operate but can’t afford to purchase, though they also do buy some tenant-farmed properties from other passive owners. More than half of their farms are in California and Florida, which makes sense given the focus on fresh produce — they highlight the different values of different farms by noting that a farmer with 10,000 acres of corn in the Midwest generates about the same amount of revenue as a farmer with 100 acres of strawberry in California.

And yes, they do highlight in their investor presentations that they have grown the value of their farmland holdings from $75 million at their 2013 IPO to ~$1.4 billion now, with 160 farms in the portfolio… though it’s also a REIT, of course, and they’ve had to issue a lot of shares to make those acquisitions — their adjusted funds from operations (AFFO) per share has gone from about nine cents in 2013 to 58 cents in 2021, and the total return for shareholders who reinvested their dividends over the past nine years has been about 200%.

That’s not bad, it’s a better return than the average REIT but a bit short of the returns you’d see from the broader market (the S&P 500 has a total return of about 250% during that same time period, the Vanguard Real Estate ETF (VNQ) has a total return of only about 113%), but maybe not the kind of wild growth you might expect as they grew their holdings from $75 million to $1.4 billion. And that’s because this is real assets we’re talking about, you have to raise money to buy them. How did they fund the growth of that portfolio over nine years, buying more than a hundred farms? By issuing shares… they went from about six million shares outstanding at the IPO to about 34 million today… and by borrowing money, they went from about $30 million in debt in 2013 to about $650 million today — perfectly ordinary for a REIT, but that’s why the top-line growth number for a REIT is rarely indicative of per-share returns. And why, when it comes to REITs, we should mostly ignore those massive growth numbers like “200X potential business upside” — if they’re going to grow to own more of the available farmland in the US, as they might, they’ll have to raise money from more investors to make those acquisitions.

Gladstone Land is still quite small, the market cap is almost exactly $1 billion, and it is not currently a high-yield REIT. They typically buy properties that have a cap rate of 5-6%, they say, but investors have bid up the price to well above book value (which is basically the carried value of the properties, minus debt), and they may not be super efficient at passing that capital through to shareholders, so the dividend yield is only about 2% (“cap rate” is the term real estate investors typically use to describe the cash income from a property — ignoring stuff like depreciation). They do pay the dividend monthly, and some investors appreciate that, but the dividend also hasn’t grown very much in the past five years, so you’ll have to be patient if you want to wait for the dividend compounding to have any real impact — if you want compounding to be more dramatic, you usually have to have either a high current yield or rapid increases in the dividend, preferably both.

Part of the reason why I oped to cover this one today is that farmland is a popular “time of crisis” investment — and it gets teased for that reason every once in a while. I shared a few comments about that topic in a Friday File last summer, when a different newsletter was teasing farmland as an inflation hedge — here’s an excerpt:

I’ve had lots of folks ask me about inflation-protected investments of late, particularly following the pitch from Stansberry’s Dr. David Eifrig about the asset class that has “never had a down year since 1992” — so I thought I’d spend a moment on that. Here’s how Eifrig pitches that special report in one of his Retirement Millionaire ads…

“The Only Asset With NO Down Years Since 1992? (It’s UP 2,010%)

“Few Americans know this, but there are two assets we’ve studied over the past decade, which have proven to be among the best ways to protect and grow your wealth, even in the worst type of monetary crisis.

“I believe it’s critical you learn about these assets right now – and the best ways to buy them.

“During World War II, for example, when millions of families lost their entire life savings through inflation and government seizure, one of the assets I’m going to tell you about enabled some families to not just survive, but also protect, preserve, and grow their money.

“That’s why at my firm we call it: ‘The Most Valuable Asset in a Time of Crisis.’”

If you’re feeling at all nervous about the world, those kinds of pitches sure strike a chord… what else does he say about it?

“This asset is up over 2,010% over the long term since 1992, without a single down year.

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“I repeat – it has NEVER had a down year since 1992… that’s 29 straight years of positive returns!

“This should be on the front page of every financial newspaper in America… but very few Americans know anything about it.

“I’ll tell you everything you need to know and the best possible ways to invest. Now of course, all investments carry risk, even this one. So please, do not spend more than you are willing to lose on this or any investment for that matter.”

That’s “farmland” for the “never had a down year” asset, something Stansberry has been touting for a dozen or so years now, following Barton Biggs’ cheery comments about the value of owning farmland in his widely-read (or at least widely-bought) book, Wealth War & Wisdom, which was published in the aftermath of the last financial crisis (in 2009) and talks in part about how owning a working farm protected both wealth and life during past crises, including World War II in Europe.

I don’t know which farmland investments Eifrig prefers, but buying farmland as a passive investment is possible, as is buying a “gentleman’s farm” if you want to be more involved, or even an individual land purchase if you want to be a farmer’s landlord, though asset prices have inflated there the way they have everywhere else.

Probably the easiest route is through the farmland REITs and similar investment funds, either private or publicly traded. There are some private platforms for investing in farmland, including FarmTogether and AcreTrader, often they work sort of like crowdsourcing deals and you buy into a particular piece of property (though they also sometimes have collected funds you can invest in to share the risk), and I have spent a little time looking into some other private vehicles in this area, including Farmland LP and Iroquois Valley Farmland. Private investments in this space, whether they’re REITs or partnerships or whatever else, tend to have investment minimums in the $10,000-50,000 range, (with lockups, so they are not to be entered into without careful thought), and I’m sure there are others I don’t know offhand — the world of unlisted “alternative investments,” particularly alternatives that generate some kind of income yield, is booming.

The two publicly traded ones I’m aware of are Gladstone Land (LAND), which tends to buy more value-added farming properties (think orchards, not wheat fields), and Farmland Partners (FPI). Both are small, not super liquid, and have low yields and low returns on equity, and trade at a premium to their book value, but they do give exposure to farmland and should, all else being equal, rise in value if farmland continues to rise in price over time. They’ve done OK, mostly because of a strong run this year

LAND has certainly been the better performer of those two since I penned those words in July, it rose almost 50% into the highs at the turn of the year — a rise that looks like it was caused by more attention thanks to ramping inflation concerns, buttressed by a strong third quarter report. It has come back down a bit in the past month or so, but what seemed like a pretty expensive REIT based on trailing results has gotten more so, going from a dividend yield of 2.5% to about 1.8% (FPI has pretty much just tracked along with the broader market, FYI). Gladstone’s fourth quarter report, which came out last week, didn’t have much of an impact on the shares. And, of course, we shouldn’t be too reliant on that “never loses value” notion for farmland, even if it’s typically true for farmland on average over long periods of time — it doesn’t mean that a farmland REIT can’t have a falling share price. LAND dropped by about 50% from the highs of 2013 to the lows of 2016, for example, and as a REIT it’s likely to be fairly sensitive to interest rate shifts in the short term.

So there you have it — Gladstone Land is still one of the few publicly-traded REITs that focuses on owning farmland, and the stock has done fairly well of late, largely because investors seem to be raising their estimate for how much that farmland will be worth. You probably wouldn’t buy this as an income investment, and it can’t really grow very quickly on a per-share basis (every time they buy a new property, they have to finance at least part of it by selling new equity), so it’s hard to really call it a “firecracker” — but if farmland rises in value, as it tends to over the long term, LAND should rise as well, and that can help to diversify a portfolio.

Does it fit your portfolio? Well, that’s your call. Let us know what you think with a comment below…

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14 Comments
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sandal339
March 2, 2022 12:37 pm

Travis is spot on as usual. First buy recommendation on 12-13-21 at $30.08. Second buy recommendation on 2-25-22 around $29.83. Today at $30.89. Definitely one of the least volatile firecrackers, which is good as MF high growth Recommendations have been slammed since February 2021.

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329
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clark30
clark30
March 2, 2022 2:31 pm

In view of the rapidly deteriorating climate situation in CA (no rain!), this seems pretty risky.

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Leo
Member
Leo
March 2, 2022 9:06 pm
Reply to  clark30

Plus constant wild fires everywhere because of Global warming.

merc
Member
merc
March 6, 2022 12:07 pm
Reply to  Leo

Not cause of global warming they changed the name to climate change cause it was proven only happening naturally ..Its bad forest management

Richard VEDDER
Richard VEDDER
March 2, 2022 4:21 pm

Leary of this one as I got stung twice by it.

tampabob
Member
tampabob
March 3, 2022 2:21 pm

I’ve owned various Gladstone investments for many years. I’ve even met David Gladstone and he is a sharp guy (has four companies). For those who think this investment is too risky check out the preferred shares (symbol LANDO). Yields 5.7%.

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tampabob
Member
tampabob
March 4, 2022 10:26 am

Are you referring to Gladstone Acquisition Corporation (GLEE)? It went public on 10/1/2021. Has very little volume and no dividend.

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tampabob
Member
tampabob
March 5, 2022 7:20 am

Thanks. I’ll keep an eye out for it. If you see anything could you please post it here?

Last edited 2 years ago by tampabob
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Kenneth Dolezal
Kenneth Dolezal
March 5, 2022 3:54 pm

Best REIT I’ve found is MDRR. I think it has value (safety) and a reasonable dividend while waiting. Probably the best reason for buying; the ticker reminds me of murder which usually happens to my account after a stock purchase.

Phillip
Member
Phillip
March 6, 2022 9:28 am

What is the difference between MDRR and MDRRP? MDRR is a “sell” on Street ratings and there are no ratings on MDRRP that I can find.

tampabob
Member
tampabob
March 8, 2022 3:56 pm
Reply to  Phillip

MDRPP is the preferred stock of MDRR (Medalist Diversified REIT Inc – 8% PRF REDEEM 19/02/2025 USD 25 – Series A) Preferred stocks typically do not have ratings.

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10777
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grozakis
Member
grozakis
September 27, 2022 5:40 am

The LAND stock was re-recommended in latest investment round of September 19th. Let me know if you need more details.

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Last edited 1 year ago by grozakis
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