The Exchanges

Q So you mentioned if you find good plots of land, what constitutes a good plot versus a less good or bad plot?

A It's a combination of things. I mean, so the largest driving factor is certainly soil quality, so there are different rating systems in different states that measure soil quality, and those geographically, in one of the 99 counties, for example, in Iowa, that rating system can work better than in other counties, so you have to really understand the nuances of the rating systems. But that will give you a baseline set of information about sort of the soil quality of the farm. That is a raw value of if it's managed well, and if it's set up right, and if it's farmed right, that's the measure of potential productivity. So then you have to go look at the other factors, right? Which is, yeah, has it been managed well? What's the fertilizer application history been on it? How's the drainage set up? So most of farms in the Midwest, we focus primarily on non-irrigated farms. Are about managing too much water, not managing too little water. So that's another whole bucket of farm management areas that you get into. And then you avoid the big problems, you know, like, we don't buy farms even if they're cheap, and it's the greatest farm in the world, and it sits behind a levee on either the Missouri or the Mississippi River. So we try to get rid of some of the idiosyncratic risks where things could really go haywire.

AI assessment note: “largest driving factor is certainly soil quality, so there are different rating systems”

Q And the selection of these operators. You mentioned some things that sound like it's just knowledge of how to do this or, or progressive practices. Is there a data component to it, or is it a qualitative assessment?

A There certainly is some element of a data quality to it, as well as qualitative things. So on the data side, one of the things we like to look at is there's something called a county T yield, which is a crop insurance yield that the USDA generates based on lots of historical data on crop production in a particular county. So it's at a county level. And it's accurate, right? I mean, this is, this is getting insurance in terms of your livelihood and that sort of thing. We like to take a look at the operator's actual reported yield, which is what they report to that insurance agency. And we like to see about a 20% above what the county average is. And that's also kind of our goal in terms of farms that we buy as well as to be beating the county crop insurance average by 20%. Another data aspect of it, people always ask. Oh, don't you ask the farmer for his balance sheet and his income statement or whatever? Well, you know, farming is one of the last cash accounting businesses in America, right? And so it is very easy for a farmer to look profitable or unprofitable depending on what it is they want to talk about that day, whether it's taxes or renting a new farm. And so the other metric that we use a lot more around financial stability is to look at the Number of acres that the farmer actually owns and what debt has been recorded against those acres versus the total number of acres…

AI assessment note: “There certainly is some element of a data quality to it, as well as qualitative”

Q Have there been any developments on technology and the venture capital piece of agriculture that you see from doing this work?

A There's certainly been a wave of big data farm companies that were heavily invested in by Silicon Valley types that have been at least financially successful, things like Farmer Business Network, Granular, Climate Corp. There's, I think, a large number of companies that have been funded, right, you know, in that space. We'll see whether that now falls out, but those big data applications were a good step forward in terms of actually being able to analyze a lot of the data that comes out of your combine and applying that to your next year's farming practices and things. A lot of our operators utilize that. We facilitate it for them. We use a company that has a lot of expertise in soil testing to not only make sure our operators are doing the right things on the farms, but also to help them in terms of their production. The most interesting one, we've seen a new company pop up that has an automated rock picker. It's basically a robotic attachment to a tractor so that you can actually go out and pick rocks in an automated fashion rather than hiring the local four H club to walk, go walk across. So, uh, yeah, that's kind of an interesting one that we'd like to see developed. That's a very practical application.

AI assessment note: “There's certainly been a wave of big data farm companies that were heavily invested”

Q Well, why don't you dive in with your background?

A I grew up in Cedar Rapids, Iowa. I was the kid of two sets of farm kids, so they grew up in western Kansas and moved in the late 19 fifties to Cedar Rapids, Iowa, and didn't go back to the farms, but it was always in our blood, and our family continued to own farmland, and Absentee form in terms of renting it out to some locals as well as relatives all the time I was growing up. Later went out to the East Coast and went to college, both at Harvard undergrad and Harvard Business School. Worked in Boston at Bain & Company in between the two, and in 1999 sort of launched myself into software coming out of business school at the height of the internet bubble, which was an interesting experience for sure. I think we were, 99 was the only class of Harvard graduates that sent more people to San Francisco than New York City, which was a leading indicator of what was going to happen, and it did happen a year later. But throughout all that, the one.com that I was at sort of fought through it, and eventually it was a company called homestead.com. Eventually became a on-ramp basically for small businesses to get on the internet, which was something people were willing to pay for, and we eventually sold that into it. So we didn't completely implode. From there, went to another software company called Demandtech, where I helped with their product development as pricing software for retailers…

AI assessment note: “I grew up in Cedar Rapids, Iowa. I was the kid of two sets”

Q So with that as a basic structure, how do you go about investing in the farmland?

A Our basic strategy is we target inefficient transactions, right? So we try to find Aunt Margaret that's selling their parents' farm that was willing to take a price discount. So we then evaluate that farm in terms of whether or not we like it at that price. We can underwrite it to the cash yield returns I talked with you about. Then we look for, you know, are there ways that we can actually unlock value after we buy it? And so that comes in many forms. That can be improving the drainage. Maybe there is a drainage problem that can be easily fixed by installing drainage tile. Or waterways or what have you. We knock down acreages. A lot of these places have an abandoned house, you know, five or six acres on it that you can then reclaim and turn into farmland. Sometimes they have three or four acres of trees too that you could take out. We also look at the potential for selling off a small portion of the farm, like three or four acres for some type of livestock production, where then we can get an easement to get all the manure for organic fertilizer. There's a whole bucket of improvements that we look at as well as a way to do things. And so, from there, you know, we've really focused in on three geographies that we have essentially proprietary deal flow into. And that is the component of our portfolio. About 50% of that is what you would call core Midwestern farmland. This is Iow…

AI assessment note: “Our basic strategy is we target inefficient transactions, right?”

Q What are the couple of most important questions you would ask someone in this space to try to suss out if they were going to be good?

A Well, I first very carefully examine how they're sourcing their deals. The diligence around how they select farms, and then also, are they actually getting these things at a discount to the market rate? Because I think it's very easy to think that you're doing that, but the reality might be separate from that. And so I would very carefully examine their proprietary Deal pipeline flow, how they've done it. And it's not enough just to say, oh, my, my operators send me good deals. Cause that's not a strong alignment of interest. Secondly, I would really poke holes in or talk with them about the return characteristics. There are people in space to talk about at least mid teen returns, right on farmland. That's just not reality. We talk about high single digits in terms of returns and sure in the short term, you might get a discount to market or have an initial bump. We might have a drought and eight dollar corn again, and land prices go up 20% a year for two years, and so it looks like you're doing great. The reality is that if you're owning farmland over a very long period of time, you're not able to do that. And for that reason, this is not a market that you try to time.

AI assessment note: “I first very carefully examine how they're sourcing their deals.”

Q So I wouldn't from the outside think, oh, you got some friends from business school who said, wow, Farmland held up in the financial crisis. This is super exciting. We can make four percent. What am I missing here?

A The other component of it is long-term land value appreciation, which is what we haven't talked about yet, and on that, we specifically structured our vehicle as separately managed accounts, so there's just a management contract with us that is for seven years, and then after that, it's annually renewable. There is no carry on the actual sale of the farm, and there's no carry at some artificial Based on a third party mark to market that no one can believe, right? We do a mark to market on a yearly basis. Every three to four years, there's an external third party mark to market, but we don't get paid based on that at all because that's not real is actually selling the thing. So that long-term capital appreciation is entirely kept by the investor. Historically, that has been around six percent. Half of that is inflation. This is a Very good inflation hedge. Soybeans go into like 3000 products, including the pen you're holding right there. I mean, it goes into everything. It is an inflation hedge, tracks inflation. And then the other three percent has been basically from crop production growth. So you're just producing more corn, more soybeans, more wheat, more garbanzo beans, whatever it is. And that has driven the other component of land value appreciation.

AI assessment note: “The other component of it is long-term land value appreciation”

Q Have you seen any impact in the crops on things like the trade war or different regulations coming out of Washington?

A Regulations coming out of Washington, certainly the biggest issue that has been put out there in the last decade was the Obama year proposed change to the waters of the United States, the WOTUS Act, where they were proposing a change to language in terms of what is a body of water in the U.S. Right now it's, you have to be a navigable body of water to be regulated underneath that, as opposed to streams in farmland or an acre pond that might form after heavy rain. And it wasn't clear when they made that language change whether or not the temporary ponds, you know, that might be there for 15 days or whatever were actually going to be regulated under the Waters U.S. Act. And if that had actually borne out, you know, either through implementation of that rule and or combination of litigation with that, that would be a very bad thing for U.S. farming in general, because you'd have to go take out permits to apply fertilizer or to do tillage practices or things along those lines. That, of course, with the Trump administration was sort of stopped, unclear. With the next political group that gets in, which way things will go? Who knows? So that's the biggest issue, though, that we track on the regulatory side. On the trade war, that certainly has been, obviously, a big negative impact and created a lot of uncertainty in the market. So the commodities markets, as well as the land market,…

AI assessment note: “On the trade war, that certainly has been, obviously, a big negative impact”

Q Curious how you think about structure. You mentioned separate accounts from two lenses. We can start with, why do you set them up that way?

A So, I mean, our view is that this is a illiquid, long duration asset in terms of how long you want to hold it. You want to hold it for longer than your typical private equity fund. And because of that case, you want to be in control of the actual disposition of that asset. You don't want to be in a fund with a bunch of people that you sort of kind of know, and somebody wants out or somebody else wants in. Well, how do we set the price of somebody getting out or somebody else getting in? I'm sure it's written down in the private placement memorandum, but unless you're actually selling assets in order to determine those exit and entry prices, that's a huge risk. Our view is from an investor standpoint, we would never want to do that. So that's the primary reason why we set it up as separately managed accounts. So you can control that. It also has some other unique characteristics, which is you can set up your own structure. So, you know, a lot of our individual clients put it in the member of the LLC is an irrevocable trust. There's some great tax advantages for doing that. Well, as long as it's well managed and it's a good farm and you buy it at the right price, there's no reason why you need to sell this one to buy another one over there.

AI assessment note: “that's the primary reason why we set it up as separately managed accounts.”

Q And then on top of that, when you go in to buy it, are there best practices of operating the farm that improve it?

A Yeah, so in terms of operating the farm, so we have a network of, like I was mentioning, we have 66 operators that operate our 87,000 acres, and we've carefully selected those operators in terms of being very progressive in their practices, using things like precision agriculture, which is a variable rate application of seed and fertilizer to maximize crop production. And so, by and large, we'll go in and remove whoever is currently Um, on the farm, lease is terminated, or it was an owner operator, and we'll put one of our qualified operators out there to farm it. That's also for us a due diligence step. So we never buy a farm when we don't know who is going to farm it. And that person has reviewed the farm with us and has agreed to the leasing rates on that farm based on it. So we never go in and buy something without, in our view, knowing what the unit economics are going to be.

AI assessment note: “using things like precision agriculture, which is a variable rate application of seed and fertilizer”

Q firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. So if it's a more difficult market or historically it's been a more difficult market to transact, how did you first get in there and figure out how to transact?

A Really one of the cores are our business, both on finding clients as well as on developing new areas and operators, which is we've really essentially grown entirely by organically on the region side in terms of finding operators. So we had A close friend that was an operator just north of Cedar Rapids, Iowa. That person, when working on a combined equipment exchange with somebody in the Palouse by Pullman, Washington for a number of years. And he said, wow, you know, I know you're thinking about buying farmland in western Kansas where you grew up. Why don't you go out and you go talk to these guys in Pullman, Washington about how farms work in Pullman, Washington. And they were a farmer operator that was out there. And we talked through it out there with them. They plugged us in with their lawyer, who is now on our team, and we started to sort of stick our tentacles out into the market, and now we have 14 operators that are in that area, all generated from that one initial contact and market research that we did seven years ago.

AI assessment note: “all generated from that one initial contact and market research that we did seven years ago.”

Q I wonder how you think about some of the adjacent potential opportunities I can walk you through. Have you ever thought about spinning this into a REIT?

A Yeah, so we, over time here, we've been approached with the idea of creating a client that was a fund that could become a REIT and go forward with that. And we've really, at this point, said no to a lot of those types of land-based, different alternative ways to manage and run land. A REIT is a perpetual vehicle where you wouldn't need to sell, you know, or specifically price things out that were out there. But we found a distinct advantage that And we are viewed as locals in terms of the transaction market. And that's part of the team that we've built as well as the fact that we're buying for what is perceived as an individual or an individual entity rather than buying for a fund or a publicly traded REIT or anything along those lines. And we think that that gives us a great advantage or our clients a great advantage in order to getting transactions at a discount. And we think we'd lose that if we were a publicly traded REIT.

AI assessment note: “we've really, at this point, said no to a lot of those”