Farmland Investing: Risks and Opportunities John R. Farris Founder - PowerPoint PPT Presentation

Farmland Investing: Risks and Opportunities John R. Farris Founder & President LandFund Partners 70th CFA Institute Annual Conference May 22, 2017

Presenter Bio John Farris – Founder & President, LandFund Partners Mr. Farris received a full-tuition fellowship to study economics and finance at the Woodrow Wilson School at Princeton University, where he was awarded a Master’s Degree. Before attending Princeton, Mr. Farris studied economics and philosophy at Centre College from which he graduated Phi Beta Kappa. He has served as an economist at the Center for Economics Research at the Research Triangle Institute, as well as a senior economics consultant with both the World Bank and the International Finance Corporation. From 2006 to 2007, Mr. Farris served as Secretary of the Finance and Administration Cabinet for the Commonwealth of Kentucky. Mr. Farris is Chairman of the Board of Directors for Kentucky Retirement Systems (KRS), and serves on the Board of Directors of Kentucky Employers’ Mutual Insurance (KEMI), GreenBrick Partners (NASDAQ: GRBK), and Kentucky Technology Inc. Mr. Farris also acts as Senior Investment Advisor to the Centre College Endowment. 2

Table of Contents I. Farmland Investing Overview II. Historical Returns & Correlations III. Macro & Micro Opportunities 3

SECTION I: Farmland Investing Overview 4

Basic Overview Farm Management Land Owner Farmer Company • Owns farmland asset • Manages farmer • Pays rent to Landlord relationship and for the right to farm • Pays annual fee to farmland the property Farm Manager Soybean Harvest on LandFund Property (Arkansas 2016) 5

Farmland Investment Vehicles Structure Advantages Disadvantages Examples Direct • Complex and time • Family Farm • Most direct method Ownership Ownership consuming Managed • High minimum US Trust • Higher level of investor control • LandFund Partners • Accounts investment ($5MM +) Private Equity/ LandFund Partners Closed-End • Economies of scale • Lower investor control • Funds Farmland Partners • (FPI) • Smallest capital outlay • Dilution felt primarily Public REITs Gladstone Land • • Liquidity by retail investors (LAND) 6

Regional Differences • Regional variation in price per acre and yield • Dependence on weather patterns • Flood and drought risk • Access to and cost of water • Cost and use of farm inputs (fertilizer, etc.) • Regional diversity of crops and livestock (revenue drivers) • Transportation costs to global export hubs • Creditworthiness of farm operators • Development of local agricultural markets 7 Image Source: https://www.ncreif.org/data-products/farmland/

Farmland Subclasses • Row Crop Farmland – Annual planting seasons for crops such as corn, soybeans, cotton, wheat, and rice • Permanent Crop Farmland – Establishments such as vineyards and almond farms, which require a 3 to 12 year capital outlay period • Pasture / Range Land – Land leased to local operators for dairy, beef cattle, and other operations 8

Lease Structures Three primary strategies: • – Cash Lease • A cash lease is the most simple form of rental agreement • Typically 1 to 3 years in length – Crop Share • Crop shares are used more frequently on farms with excellent, or sub- par soils • Entitle owner to 20%-30% of crop yield per acre – Blended Lease • Includes a base cash rent, plus a “kicker” component driven by commodity prices, realized crop yields, or some combination thereof 9

Farmland Facts • Less than 1% of U.S. farmland is owned by institutions & funds • Average age of a U.S. farmer = 59 years old • Only 3% of U.S. farm income is comprised of government subsidies 1 • Asset class is now recognized as a viable alternative investment Harvesting cotton in Phillips County, Arkansas – November 2013 1. Source: USDA ERS, Farm Income and Wealth Statistics, U.S. and State Farm Income and Wealth Statistics 10

SECTION II: Historical Returns & Correlations 11

Historical U.S. Farmland Returns • Farmland returns are driven by: 1) annual rent and 2) change in farmland asset value 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10-Yr Avg. Office Farm S&P 500 Apartment Apartment Farm S&P 500 S&P 500 Retail Industrial Farm 20.5% 15.8% 25.9% 18.2% 15.5% 18.6% 32.1% 13.5% 15.3% 12.3% 13.2% Timber Timber Farm S&P 500 Farm S&P 500 Farm Industrial Industrial S&P 500 Retail 18.4% 9.5% 6.3% 14.8% 15.2% 15.9% 20.9% 13.4% 14.9% 11.7% 8.7% Hotel Retail Timber Retail Industrial Retail Retail Retail Hotel Retail S&P 500 18.1% -4.1% -4.8% 12.8% 14.6% 11.6% 12.9% 13.1% 13.2% 9.0% 8.6% Farm Industrial Retail Office Retail Apartment Industrial Farm Office Apartment Industrial 15.9% -5.8% -10.9% 11.7% 13.8% 11.2% 12.3% 12.6% 12.5% 7.3% 7.9% Industrial Apartment Apartment Industrial Office Industrial Apartment Office Apartment Farm Apartment 14.9% -7.3% -17.5% 9.4% 13.8% 10.7% 10.4% 11.5% 12.0% 7.1% 7.1% Retail Office Industrial Hotel Hotel Office Office Hotel Farm Office Office 13.5% -7.3% -17.9% 9.0% 11.8% 9.5% 9.9% 11.1% 10.3% 6.2% 6.9% Apartment Hotel Office Farm S&P 500 Hotel Timber Timber Timber Hotel Timber 11.4% -9.4% -19.1% 8.8% 2.1% 8.3% 9.7% 10.5% 5.0% 4.7% 6.0% S&P 500 S&P 500 Hotel Timber Timber Timber Hotel Apartment S&P 500 Timber Hotel 5.5% -36.6% -20.4% -0.2% 1.6% 7.8% 7.7% 10.3% 1.4% 2.6% 5.4% Data Sources: NCREIF, NYU Stern Note: S&P 500 returns include dividends 12 Past performance does not guarantee future results

Low Correlation with Traditional Real Estate • Farmland returns exhibit low correlations to traditional real estate, and almost no correlation to equities and treasurys 20 Year Correlations (1997-2016) of Annual Returns for Selected Asset Classes Farmland Timberland Hotel Apartment Office Industrial Retail S&P 500 Nasdaq 100 10 Yr Trsy. 1.000 Farmland 0.644 1.000 Timberland 0.332 0.705 1.000 Hotel 0.318 0.388 0.818 1.000 Apartment 0.329 0.584 0.917 0.918 1.000 Office 0.324 0.512 0.877 0.941 0.960 1.000 Industrial 0.430 0.421 0.701 0.861 0.765 0.824 1.000 Retail 0.035 0.207 0.321 0.156 0.236 0.178 0.175 1.000 S&P 500 -0.104 0.128 0.145 0.006 0.106 0.018 0.045 0.812 1.000 Nasdaq 100 -0.084 0.049 0.183 0.208 0.236 0.195 0.083 -0.593 -0.567 1.000 10 Yr Trsy. Data Sources: NCREIF, Morningstar, NYU Stern Note: S&P 500 and Nasdaq 100 returns include dividends 13 Past performance does not guarantee future results

Risk Adjusted Returns • U.S farmland displays strong risk adjusted returns and may be utilized to increase portfolio efficiency Annualized Risk & Return 1997-2016 16% BRK-A 14% NASDAQ AVG. EXCESS RETURN 12% Emerging Markets US Farmland 10% Retail 8% Apartment S&P 500 6% Timberland 4% 10 Yr US Treasury 2% 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% STANDARD DEVIATION Data Sources: NCREIF, Morningstar, NYU Stern, Berkshire Hathaway 14 Note: S&P 500 and Nasdaq 100 returns include dividends Past performance does not guarantee future results

Current Yields from Farmland • Current yields from farmland have been attractive to many investors in recent years when compared with yields from other assets Current Yields from Selected Assets 4.00% 3.50% 3.00% 2.50% Yield 2.00% 1.50% 1.00% 0.50% 0.00% 10 Yr JGB 10 Yr Bund 10 Yr Gilt S&P 500 Div. 10 Yr Munis 10 Yr T-Note 30 Yr T-Bond 20 Yr US Row Crop Yield (AAA) Corporate Farmland (AAA) Data Sources: NCREIF, Bloomberg (as of April 2017) 15 Past performance does not guarantee future results

Inflation & Farmland Returns CPI & Farmland Returns: • Farmland returns act as a hedge 1992-2016 against inflation 40.0% – For the period 1970-2014, CPI 35.0% farmland’s positive correlation NCREIF Farmland 30.0% Returns with inflation (0.65) was Annual Change (%) 25.0% higher than treasurys, gold or stocks 1 20.0% 15.0% – For the period 1914-2011, 10.0% farmland returns show a 0.63 5.0% positive correlation with CPI 2 0.0% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1. Private real assets: Improving portfolio diversification with uncorrelated market exposure,” TIAA Global Asset Management, Winter 2016 16 Data Source: NCREIF, InflationData.com; compiled by LandFund Partners 2. Purdue University’s Center for Commercial Agriculture

SECTION III: Macro & Micro Opportunities 17

Macroeconomic Fundamentals US Soybean Exports • Supply of row crops is constrained 50 45 due to: 40 35 Thousand Tons – Availability of arable farmland 30 25 20 – Access to water 15 10 – Ability to export 5 0 1964 1974 1984 1994 2004 • Demand for row crops such as Chinese Soybean Imports soybeans is increasing due to: 90 80 Chinese – Population growth 70 Consumption Million Tons 60 50 – Demand for protein 40 Total Imports 30 • 3 - 5 oz. grain = 1 oz. meat 20 Chinese 10 Production 0 18 1964 1974 1984 1994 2004 Source: USDA ERS Database; compiled by LandFund Partners