Wednesday, March 04, 2015

I Bought The Farm

No, I'm not dead yet (but my posting frequency might lead one to conclude that...).

Recently while listening to the Financial Survival Network podcast, I heard of a real estate investment trust (REIT for short) that got my attention.

There are several kinds of REIT's, but the ones that I really like hold property and rent it out (as opposed to the kinds that hold mortgage debt), and then in accordance with IRS rules that govern these entities, they pay out 90% of their revenues to shareholders as dividends. 

My long-time favorite REIT, Realty Income Corp. (stock symbol: O), is a "triple net lease" REIT, meaning in their rental agreements with their tenants it's part of the contract that the tenant is responsible for insurance, maintenance, and taxes on the property, giving O "nothing but net." 

O rents out commercial properties to businesses with good things going for them, typically on leases lasting one or two decades. It's a very solid, stable way to do business, so I don't consider them to be a holding that I have to think about very much. Chances are that no matter what happens economically/politically in this country, there will be business and there will be a need for commercial space in which to do business.

This is the view looking north from my computer desk where I'm
writing this, land that is used to grow wheat - I wonder if I own
a piece of that now?
However, this kind of investment is a degree or two removed from the most solid foundations for investments: food, clothing, and shelter, the things that people always need. That's where the REIT that I learned of through the FSN podcast comes in: Farmland Partners Inc. (symbol: FPI).

This REIT has in its portfolio approximately 48.7 thousand acres of farmland, which it operates as farmland! These guys are not buying farmland and turning it into shitty condos, strip malls, etc. They're producing food, the primary item of the human "big three," something for which demand never goes away. What's more, the farms FPI owns and operates produce "primary crops," things like corn and wheat, which are often rendered into ingredients but which can be easily stored long-term and later consumed as-is. 

Businesses fail, buildings crumble, money supply inflation puts luxuries out of reach, but food is never an option. If people's discretionary consumption choices become fewer and fewer, it will most likely be the case that a big part of the reason for those dwindling lists of wants is the conscious decision to allocate more of their cash flow to satisfying the need for food. Thus, I look at an investment of this sort as almost being a kind of purchasing power insurance policy, much like ownership of precious metals is: as other asset types may begin to crater during a financial crisis, a company that both owns land and produces food should continue to deliver on cash flows relatively well, which can help to keep one's own cash flow up to snuff for meeting the needs of daily life. So, with these things in mind and after looking over the company's performance, I bought in. 

As always, this is not investment advice, this is just my opinion, do your own research, blah blah blah SEC hocus pocus firstamendmentwhat'sthat? 

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