The transcript from this week’s, MiB: Brandon Zick, CIO, Ceres Partners Farmland, is below.

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*This is Masters in Business with Barry Ritholtz on Bloomberg Radio*

On the latest Masters in Business podcast\. I sit down with Brandon Zick\. He is the Chief Investment Officer at Ceres Farmland Funds, a $2 billion firm that specifically invests in farms\. I know Brandon for, for a long time\. And I’ve watched this asset class grow\. I thought this was really a fascinating conversation\. You just have no idea how complex and interesting farmland investing can be\. I thought this was fascinating and I think you will also, with no further ado, my conversation with Sarah’s Farms\. Brandon Zick\.

**Brandon Zick**: Thanks for having me, Barry\.

**Barry Ritholtz**: Well, you and I know each other for a long time, and this is long overdue to have this conversation\. And the Wisdom Tree acquisition was the perfect excuse\. We’ll, we’ll get to that in a moment\. I wanna start with your background, which is kind of fascinating\. You grew up on a dairy and crop farm in northeastern Pennsylvania\. How did that farming upbringing shape your attitudes and thoughts about lands, agriculture, value and risk?

**Brandon Zick: **Yeah, that’s a great question because growing up on a, an really active family farm, you learn a lot of things\. And one of ’em was, I definitely did not wanna be a farmer for the rest of my life\. We did real work\. I was the oldest of six and so, and I had great parents who, you know, instilled great values with us\. But one of those values was the value of hard work\. And we spent a lot of time before and after school every day actually running this dairy with our parents\. So, so you’re,

**Barry Ritholtz**: You’re up at 5, 5 30 milking cows Before school?

**Brandon Zick: **Yeah, before school, yeah\. For us it’d be about four 30\. And with, with three brothers, usually there’s three jobs on a dairy milking cows, working with equipment and then managing manure\. And even though I was the oldest brother, I was really good at the third\. So that’s what I was focused on\. Well,

**Barry Ritholtz**: Shoveling manure prepped you for your jobs on Wall Street, right?

**Brandon Zick: **That’s right\.

**Barry Ritholtz**: That’s the obvious joke\. So, so let’s talk about what led you to Wall Street\. You go to Notre Dame, you get A BBA in finance and a concentration in Japanese, which is sort of surprising\. What was that career plan originally, other than not a farmer?

**Brandon Zick:** When I went to Notre Dame, I, I just wanted to do something different and I didn’t really know what I wanted to do, but I actually had a, a friend in my dorm that I said, what are you majoring in? And he said, well, my dad works at Merrill Lynch, I think finance\. And I said, well that sounds interesting\. And so that’s how I started thinking about that\. And taking Japanese as a, a freshman at Notre Dame was really more about just doing something different than the Latin and French I took at my Jesuit high school in Scranton, Pennsylvania\. And they talked me into doing a study abroad in Japan\. And I really fell in love with the country and the culture\. And if I had been looking in, you know, forward instead of reverse, I probably would’ve taken Chinese or something else\. I thought I was looking backwards and, you know, continued on with the Japanese and then was lucky enough throughout my career to be able to spend some time there\. Not full-time, but at least to travel to Japan\. And if we ever get to the point that we have Japanese investors, that’d be really exciting too\.

**Barry Ritholtz**: So first gig, right outta school, as you become, you join the finance analyst program at Lehman Brothers\. Was that here or was that close to home?

**Brandon Zick: **That was here in New York\. Yeah, we started training in one World Trade at July of 2001 and we were eventually in three World Financial Center and I spent three years at Lehman Brothers and learned a lot of different things, but some of it was, I don’t know what I want to do\. Right\. And I had a friend that had moved to Morgan Stanley and that’s how I made my way shortly thereafter over there and spent six years at Morgan Stanley in various roles\. But I knew I always wanted to be on the buy side\. And there, you know, everyone dreams of being in private equity and how do you get there? And it’s a difficult path\. And when you think about what are the things that you could be good at or that you have interest in, that’s how I kind of looped back around to this agriculture piece because I had a lot of valuation experience at Morgan Stanley and we worked on a number of transactions and I thought, well, how do I apply this to agriculture?

And they’re just, it’s not like in every other asset class where there’s 30 or 40 places and everyone has a fund and you just choose where you want to go\. There’s actually very few people that invest in agriculture exclusively\. And so it was kind of stacking that background of valuation and transaction experience and maybe a rekindled interest in agriculture and farmland\. Not on the actual labor side, but on the investment side\. Right\. How do you do this outside of just the big boys like John Deere or Case ih or at the time Monsanto or these big ag companies, how do you do it? So that’s kind of how I made that path all the way back around\.

**Barry Ritholtz**: So you prefer spreadsheets to pitchforks and shovels

**Brandon Zick: ** A little bit, yeah\. Although there are plenty of days in my career now that you get tired of being in the office and you say, I’d rather, I’d much rather drive around and look at some of our properties and check in on some of our farm tenants\. Well,

**Barry Ritholtz**: We’re gonna talk about the farms and the tenants and what that, that investment process is like\. But I just wanna stay with Morgan Stanley for another moment\. You’re there for six years, you start out really as a grunt in strategic planning, due diligence, valuation analysis, deal negotiation, execution, but eventually you become a VP in the investment management division\. Is that where you really hone your chops on acquisitions and strategy?

**Brandon Zick: **Yeah, it was an interesting time to be there within investment management\. Morgan Stanley had a mandate to really grow that business, especially on the alternative side\. So the plan had been to put together a, a pretty sizable balance sheet by minority stakes and asset managers, maybe take some asset managers like Frontpoint over completely\. And then the great financial crisis happened and we went from a team that was really given the opportunity to, to use a balance sheet to, we were told we need to create a balance sheet\. So things that we had bought now needed to be sold\. And that was really the impetus for the transaction that sold Van Campen and a handful of other Morgan Stanley equity businesses to Invesco\. So on that deal, I was actually working more on the sell side of that deal\. And when you’re selling things, you realize this probably isn’t a long-term career strategy\. Eventually you run out of things to sell,

**Barry Ritholtz**: So you started at Lehman, but you got out of there before the financial crisis\. You lived through the financial crisis at Morgan Stanley, the CEO at the time was John Mack, is that right? Oh,

**Brandon Zick: **When I started it was Phil Purcell, John Mack came shortly thereafter and then, or came back shortly thereafter\. And then during my time there, within investment management, James Gorman came, came over from Merrill to take over\.

**Barry Ritholtz**: I had Mac on the program a couple of years ago after he wrote his autobiography\. And really, of all the major brokerage firms, there were a handful of companies that came through the financial crisis balance sheet and reputation intact\. Max seems to be the guy that guided Morgan Stanley through cut that very reasonable deal with Mitsubishi for some much needed capital and came out the other side\. And Morgan Stanley is now absolutely one of the biggest brokerage shops full service brokerage shops on the street\.

**Brandon Zick: **Yeah, I mean they’ve, you know, not without peril for everyone at that time, but certainly, you know, they were able to navigate, navigate through in a way that very few were able to do it as successfully as Morgan Stanley was\.

**Barry Ritholtz**: And at Morgan Stanley, is that what you got your chartered Alternative investment analyst credit?

**Brandon Zick: **Yep, yep\. I did that\. I didn’t have the time to do the CFA also at the, during that time\. But yeah, it was something that was slightly different and you know, I always had interest in commodities and other types of alternatives, not just hedge funds or private equity\. So there was, it was just a way to learn a little more and add it to the resume\. How,

**Barry Ritholtz**: How much did the financial crisis precipitate? You’re saying, Hey, I have skills and I have insights, I’m going back to farmland, but from a different perspective\.

**Brandon Zick: **Yeah, well, it definitely started the conversation and being here in New York, I knew there were very few options for probably investing in agriculture at, at least at that time\. Even today, we don’t recommend it, but there are people in the big city in on the coast that invest in farmland\. And I had a, a very close friend from Notre Dame that at the time was running private equity at Notre Dame’s Endowment\. And I had contacted him and said, I’m interviewing with a few of these firms that invest in farmland\. So groups like John Hancock and UBS that had existing funds or separate account businesses that would invest in US or global farmland\. And I asked him, have you guys underwritten them? Have you invested with them? Have you talked to them? And he was very frank, and he said, generally, we don’t think you get paid for the, the risk involved with investing in land and the duration that you need to hold it\. But he said, let me introduce you to it\. There’s another Notre Dame guy that, he started something really small, he’s got very few assets, but he’s investing in farmland\. And that’s how I met our founder, Perry V through my friend Tim Dole, who’s now the CIO of Notre Dame’s endowment actually runs the whole shop\. Oh, really? And so he’s had a very successful career and one of the best decisions, at least from my standpoint that he made, was putting Perry and I in touch\.

**Barry Ritholtz**: It’s a, it’s amazing how these random introductions through various networking groups and alumni groups really can lead to some interesting outcomes when you join CS in 2010, $30 million\. I mean, that’s a, that’s a small single brokerage account\. What, what were you thinking joining a firm that tiny\.

**Brandon Zick: **You know, that sounds a lot like what my wife was asking me at the time too\. Why are we doing this and what are we doing? And it was interesting, there were, Perry had 30 million in assets, I think it was 17 million in equity, and we didn’t charge on the debt\. So he said, I can afford to pay you something\. It won’t be much, but it’ll be something\. And I, I talked to my wife Erin, and said, I think this would be a great opportunity\. And she kind of echoed some of the things that people I worked with at Morgan Stanley when I said, well, what do you do if this, yeah, what do you do if this fails? And of course no one knew anything about what we were gonna do, but they said, well, what if it fails? And I said, well, if it fails, there’s two things that gimme confidence\.

One is I’ll know it, there’s only, you know, it’s a very small shop, it’s not like some trader in Singapore’s gonna blow us up overnight\. I’ll know it’s not working\. Either the investments are bad or we’re not raising money\. And the second was, there’s gonna be a great skillset developed here that even if it doesn’t work, the worst thing I can do is just move back to New York\. And now I’ve got a differentiated thing on my resume\. So, you know, we started there, we moved in December of 2010 to South Bend, Indiana\. It’s not a great weather trade really\. Right\. Even in New York, December’s not great, but South Bend it’s much worse\.

**Barry Ritholtz**: That’s like zero and a lot of snow\.

**Brandon Zick: **It’s cold\. Yeah\. There was a lot of snow as the moving truck was moving in, but it, but it’s been great\. And we started to really build that, that momentum\. And you know, just being in on the ground floor of a company with a founder who has a vision is, you know, you can’t ask for anything more\.

**Barry Ritholtz**: So farmland is a real asset\. It’s different from traditional real estate assets\. You think of offices, multifamily warehouse, there’s so many different single family homes\. What is it about farmland that makes it such a unique investment opportunity? Yeah,

**Brandon Zick: **I mean there’s a few things that go into it that just make this market different\. And you don’t, I don’t personally think you have to have grown up on a farm to know anything about farmland or agriculture, but it is a very, you know, it’s a very people person business because these are the types of properties that we believe you have to rent directly\. We don’t use just property managers to go out and do it\. But in farmland, there hasn’t really been an institutional roll up\. So in office and in manufacturing and distribution centers and cold storage, everything’s been rolled up over time into big institutions\. And probably the most similar to farmland, when you think of what is the underlying asset would be timber\. And back 40 years ago, Jeremy Grantham and others started a huge kind of move of taking the end users of timber and handing their, their assets that they’re gonna use as part of the end product to investors\.

But in farmland, the end users don’t own the land\. So the groups like John Deere and Monsanto and Mosaic and a DM, they might either sell into agriculture or buy products out of it\. But the land, while it is the true means of production, it’s usually owned by others, not these big corporations\. So particularly in the Midwest, you’d say the active family farmers like that farm I grew up on own, about 40% of the real estate institutional investors today own about 3%\. And that includes the largest investors like the Mormon church, the Bill and Melinda Gates Foundation groups like Cirrus that might own between a couple hundred million to three or 4 billion in assets\. But you just don’t have these big other groups that own land\. It’s a very disperse ownership group of made up of estates, trusts, non-farming heirs that have owned this for generations\. And two or three generations previously, they were actively farming the ground\. They went to college and did other things\. But there’s zero, pretty much zero vacancy in US farmland\. Zero vacancy\.

**Barry Ritholtz**: That’s amazing\.

**Brandon Zick: **Every, every farm that can be farmed is farmed every year\. And you lose farmland every year in the US because of things like development and conservation\. And in parts of California, maybe lack of water aridity that they take farms outta production to transfer water to other properties\. So you have this group of, or this total pile of farmland in the US that gets smaller every year\. You have farmers that understand this is a scale game they want to grow\. So it’s an interesting dynamic for investors to come into the space because it’s not as if, if you decided tomorrow, Barry, that you wanted to farm a hundred thousand acres, you could buy all the equipment, the seed, the fertilizer, the chemicals, and you could find the labor to do all of that\. But what you wouldn’t find is a hundred thousand available acres to go to go farm it\.

**Barry Ritholtz**: It’s that that small amount of acreage comes up each year?

**Brandon Zick: **Yeah, it’s very well, it’s just not up\. There’s not a jump ball every year for it\. It’s all occupied\. And even most farmers, and I’ll use the Midwest as an example, because growing up in the Northeast farmland was much different\. There wasn’t quite as a robust, a rental market in the Midwest, which is one of the reasons we’ve focused on that is there’s a very robust rental market and we wanna rent land\. So we want not just one or two large farmers who will get, provide us with a rent indication or a rent bid\. We want the opportunity to have 10 or 20 different farmers then\. And these are all we work with across the board, 170 different farm tenants today\. And you know, all of those farm tenants rent our land, they own land and they rent a lot of land from other people\. So that actually becomes kind of a long-term proprietary deal sourcing network for new acquisitions\. So we feel like we are doing the institutional roll up\. If you decide if we decided we’re only gonna do deals of 25 or 50 million in size, there’s not a lot of deals to do every year\. And certainly not in the Midwest, mostly smaller family farms, regional farms that occasionally come up when the next generation decides, we don’t wanna farm this the way mom and dad and grandpa did\. We’re we’re going in the big city\.

And even a lot of what, they’ve already made that decision in some cases a generation ago, but they still own the land\. It’s been more of not a financial asset, but more like a family asset\. And what you tend to see, and and taxes drive a lot of behavior in every industry in agriculture, it’s pretty meaningful because if you have this one very large real estate asset, people usually wait to get that step up in basis\. And then they’re saying, well, now is the time we’re gonna sell regardless of market conditions\. It’s, we don’t wanna pay the tax going back 3, 4, 5 generations to a cost basis of nothing\. Right\. So there are kind of unique time periods and maybe 2012, end of 2012 was an example where there were some new tax things coming up, a higher cap, long-term capital gains tax, the Obamacare investment tax\. And there was at least a discussion around that estate tax exemption being reduced from, I think at the time it was at four and a half or five and a half million per spouse down to a million\. So that drove some real behavior at the end of 2012 from people saying, we wanna sell this before the taxes go up\. Usually folks just wait until they get that step up in basis and then they’re gonna sell it

**Barry Ritholtz**: And, and today a family, or what is it? 15 million? 12 used, used to be 12 million exemption for states\. I think it’s up to close to 15 per

**Brandon Zick: **Yeah\. Per spouse\. Per spouse\. Significantly larger\. So any discussion around a reduction in that, which obviously things get banned permanent, and I’ll use air quotes around permanent because 10 years is permanent these days, everything changes\. But yeah, that when you have this one significantly large asset, the the tax taxation on that will dictate how they move it sometimes\. Huh\.

**Barry Ritholtz**: Really fascinating\.

We were discussing earlier how farmland generates revenue, and we’re gonna go into great detail with that\. But I, I wanna explain to investors what farmland gives them exposure to\. What, what are you getting when you buy a chunk or a bunch of different farms?

**Brandon Zick: **Yeah, so farmland, and I’ll sp I’ll focus more on Midwest row crops, but row crops generally are annual crops because there are a few different buckets\. And when

**Barry Ritholtz**: You say row crops, I think corn, wheat, barley?

**Brandon Zick: **Vegetables, annual crops, crops that are planted every year, you rotate as opposed to permanent crops\. And, and really it’s a, a complete distinction\. Permanent crops would be things like wine, grapes, pecans, almonds, pistachios, blueberries, things like that where your exposure is not just to dirt, which is what row crops really is like our asset is dirt and there’s optionality around what you can plant there\. Your exposure in permanent crops is more specific to a specific crop and in some, in some cases also a very specific variety\. So if you had red delicious apples and they’re out of favor and people want honey crisp apples, then while you own apples, you don’t own the prime asset\. And so we’ve focused almost exclusively on row crops and with ro, and we’ve done that for a few reasons\. One is we think it’s much less risk, but it also hits on the, the investment objectives of farmland, we think more cleanly\.

So some of that is current income, a positive correlation with inflation diversification in a portfolio, non correlation, and then also an appreciating capital asset\. So our asset is primarily dirt\. So there’s, there’s a little bit of appre depreciation you can take around things like if there’s buildings or grain storage bins or irrigation equipment\. But primarily our asset is just dirt and it’s appreciating over time\. And the reason for that is a few things\. The Chicago Fed has data going back almost 70 years\. It’ll say that farmland has averaged about 6% price appreciation during those 70 years on an annualized basis\.

**Barry Ritholtz**: Is that real net of inflation or before inflation?

**Brandon Zick: **That’s total\. Wow, that’s gross\. So if you look at what compose it, what makes up that it’s really just inflation plus gains in productivity\. So every time there’s new technology, whether it’s seed genetics or fertilizer technology or equipment technology, anything that can create more yield on a farm, in theory that re that return should fall to the landowner\. Or at least a portion of it should fall to the landowner, not just to the operator\. So if you’re an active manager, we feel like you’ll capture some of that\. If you are a passive owner of land that doesn’t understand well, what is the, what is the land actually producing? What should I be generating in rent? How do I capitalize that into a land value? Maybe you don’t\. But if you look back over time, that capital appreciation’s been about 6% and it’s really just those, maybe there’s been a little bit of cap rate compression, but it’s more around gain some productivity and then just CPI inflation\. Let,

00:21:49 \[Speaker Changed\] Let, let’s talk about inflation\. I was reading last week that beef prices are at record highs for many types of investors, especially fixed income inflation is really a big challenge to navigate around\. It sounds like with farmland, inflation isn’t necessarily a bad thing\. How, how do you think about rising prices, especially in the supermarket and what that means to the properties you own?

00:22:16 \[Speaker Changed\] Yeah, so within agriculture inflation comes two ways\. So if you’re an operator, if you’re a farmer, inflation’s real because you’re,

00:22:24 \[Speaker Changed\] You’re paying more for seed, fertilizer, chemicals, equipment,

00:22:27 \[Speaker Changed\] Wages comes in wages, everything that gets baked into growing that crop\. Inflation plays a part in it as the landowner, the actual dirt has a very positive correlation with inflation over time\. So we, I’m not gonna say we love inflationary environments, but this is an investment that’s built for inflationary environments and the way that we think about how global central banks treat, you know, the way they do business\. We think we’re in an inflationary environment for the, the long term\. So we think this is an asset that works well with that

00:22:58 \[Speaker Changed\] This is a good hedge against rising prices\.

00:23:00 \[Speaker Changed\] That’s right\. And we’ve, you know, back when rates were extremely low, a lot of our investors used farmland or used Cirrus as a inflation sub or a fixed income substitute\. Something that’s positively correlated with inflation, even with rates being higher, I view farmland more as a tips like thing, and we haven’t seen much appreciation there\. What,

00:23:21 \[Speaker Changed\] What is the yield on farmland as an investor and where does that yield come from? Is it rent, is it sale of property? Is it other elements?

00:23:31 \[Speaker Changed\] Yeah, so the, the gross rental yield on our portfolios range between four and 5% a year\. Now, when you think about, if you look at the index, so there’s non investible in indices that are out there, or if you look at the, the Chicago Fed or some of the large land grant universities, they’ll put out a lot of data around what cap rate do, do farms trade at\. Because while there’s no Indiana farmland go on Bloomberg yet, there, there are a lot of public transactions that happen and will attend two to 300 public auctions a a year and they’ll be in attorney’s offices, VFWs, these are on a random Tuesday night at six o’clock, someone’s selling 120 acres of farmland and we track where does this sell versus our reserve price\. We know what rent we could earn on that property\. So what implied cap rate is land selling at, generally speaking in the Midwest, in the Chicago Fed seventh district land trades at one point half to 2\.5%, and your buyer is typically a neighboring farmer\.

00:24:33 So that’s their strategic investment they’re making\. And that farmer may take the land owner rental return and their operating return and compress them together to justify whatever price they’re paying\. But we try to target that four point half to 5\.5% when we purchase a farm\. And that’ll come, it’ll all come exclusively in terms of rent, that’s what we’re underwriting\. But then the total return will be that mix of rental income and then appreciation over time\. And appreciation can be that beta that I referred to that, you know, Chicago fed data that says 6% a year on average\. But then there’s alpha that we can add\. And a lot of that is because the people that are selling farms are usually not active farmers\. I mentioned these are estates trust, non-farming heirs, and there’s some low hanging fruit in terms of CapEx that a farmland investor can do to decrease the risk of a crop growing and also increase the yield\. So a really, you know, a common thing that we do is add irrigation, huh? And that irrigation will help us increase the yield, decrease the risk for the tenant, and it increases our rent, but also we can capitalize that increased rent into a higher land value over time\. So if we can find those opportunities to do the CapEx, that’s our bread and butter\.

00:25:48 \[Speaker Changed\] I I, I’m gonna say something that sounds a little ridiculous, but you are a gram dod valuation investor into farmland\. Is, is that, am I getting this right?

00:25:58 \[Speaker Changed\] Yeah, I mean, there’s no black box here to what we’re doing\. It’s really a blocking and tackling strategy\. And we encourage all of our investors when they, when they’re contemplating this, or even on an annual or or biannual basis, come out and look at these properties and see what we’re doing\. And, and we have folks that have, you know, trade, they’ve been trading their entire career and they’ll come to a farm auction and say, well, you were underwriting the same rent on two properties across the street from each other\. One sold for x one sold for two x, how does that happen? Right\. And it’s just who wanted which one and how in some, in some cases or instances, the way in which the farm is being sold is inefficient\. The rental market’s completely inefficient\. So there are times that we’ve bought properties in some cases from other institutional investors and we’ve doubled the rent on day one, not because we wanted to charge an uneconomic rent, but because the farmer was willing to pay that rent for that land and, and the, the active management that the previous owner was using was either not very good or not that active\.

00:27:00 So that’s where we think we, we do a really good job of just identifying where can we add alpha? And then again, it’s not a black box\. This is really just ticking and tying and blocking and tackling\.

00:27:12 \[Speaker Changed\] So let’s, let’s talk about that alpha, you talked about rental income and appreciation and sale of land, but I recall a conversation we had years ago up in Maine where you described all these additional ways that professional farmland management generates improved economics\. And some of the notes I took mineral rights, solar and wind farm easements, additional land use, how do you take farmland that for centuries has just been producing crops and find ways to improve the economics?

00:27:49 \[Speaker Changed\] Yeah, it, and you know, investing in the US has a key part of this because the landowner has a lot of rights that in other parts of the world you just don’t have so mineral rights here in the US the the surface owner generally owns them

00:28:01 \[Speaker Changed\] All the way down, right?

00:28:02 \[Speaker Changed\] Yeah\. And, and in some cases those rights have been severed a hundred years ago and in certain parts of the Midwest and out west you don’t own mineral rights\. We like to own them\. It’s, it’s kind of funny, the family farm I grew up on in northeastern Pennsylvania growing up, no one knew what Marcella Shale was, right? But everyone in Susquehanna County has made more money pumping gas than they ever did milking cows\. And it was really seeing that in the early two thousands that as we buy land, you think, well how do you maximize the value? These are, these are real assets, they have to be actively managed\. Something as simple as harvesting timber, that that’s really low hanging fruit, doing select cuts, renting farms out for recreation or hunting\. Frankly, if you don’t rent it out, someone will hunt that property anyway without insurance and without paying you anything\. Right? So you might as well get insurance and get paid for it\. So Perry had Perry Vit our founder, he had been doing that long before in parts of Indiana and Illinois generating mineral rights\. But the way that he structured our vehicle was really beneficial to some of these long-term value options because I think when he was starting Sirus in 2007, most of the people that he worked with at the time and and friends of his in private equity said, just set up a typical draw down fund and get it invested\. And

00:29:17 \[Speaker Changed\] As opposed to perpetual, yeah\.

00:29:18 \[Speaker Changed\] At the end of eight or 10 years, just sell ’em all off\. He decided that an evergreen fund really fit the asset class better because most of the farm tenants were working with, they wanna farm this property for 10, 20, 30 years\. And that’s kind of the way they’re thinking in terms of how they grow their business and being able to own the property for that long makes a lot of sense\. If you have lessees that wanna rent that way\. And if you think of who are the ultimate over time, who are gonna be the ultimate investors in this asset class, it’s going to be folks that have very long dated either goals or liabilities\. So endowments, foundations, trust, insurance companies, infrastructure funds, companies, insurance companies\. So having this long dated asset where you’re not forced to churn or forced to have these transaction costs is really important\. And what we’ve, what we found later on too was some of the optionality around farms\. So wind has been around for a long time and that’s kind of a mildly incremental increase in revenue on land\. You, you can

00:30:14 \[Speaker Changed\] Put a wind farm up on a farm, but still you

00:30:18 \[Speaker Changed\] Continue to farm it also\. Yeah\. On a 700 acre farm, we have one in western Indiana has seven wind turbines\. They might take up 20 acres total between the turbine and the roads\. The rest of it we continue to rent\. So that rent from those wind turbines, it’s incremental\. It might increase 20 or 30 basis points over your farm rent\. So we’ll take it, but, but it’s not gonna change your life\. When we started doing things like solar\. So solar, you’ll instead of seeing 20 or 30 basis points, you’re seeing on an option period, maybe a three to five x the income return\. Really? Wow\. So if you think back to, we’re buying land at a four point a half to five and a half percent income over the course of five years during an option period, if it were to go to solar, now we’re generating 15 to 20, 25% annualized income\.

00:31:04 Wow\. So we like that\. But in that case, it’s taking the whole footprint of the land\. And if when we buy a farm, we’re just underwriting it as an agricultural property, farm rents CapEx, what type of return do we think we can earn over time? And we’re targeting kind of that eight to 10% net through a cycle on farmland\. But then once we own the property and as you aggregate properties over time, maybe we started with a couple hundred acres 10 or 12 years ago, but now in a township we now own 2000 acres and it’s just been all of these incremental Bolton acquisitions\. Now that has probably more interest from some of the developers on the solar side or for other things too that can be even much higher revenue or value\. But we always fall back on, if it’s just a farm, that’s what we underwrote and we’re happy with that and we’ll continue to aggregate those properties over time\. We have over 500 today\. There are years where we’ll do 30 or 40 closings or transactions to invest 80 or a hundred million\. Most institutional investors would never do that\. But we’ve, we’ve really decided that that’s where you can add a lot of alpha on the acquisition side by doing these boltons at a discount to what that, you know, like you said, it’s a very finance worthy strategy\. It’s just being applied to an asset class that you usually don’t see it\.

00:32:21 \[Speaker Changed\] You mentioned leases\. When I think of a lease, I think of either an apartment lease for a year or two or my office lease here in New York for 10 years\. How long does a, the average farmer lease their land for or lease your land for if they want to farm a crop?

00:32:42 \[Speaker Changed\] Yeah, so we try to target three to five year leases\. And I’d say three is the overwhelming majority given that we’re, our farms are mostly growing row crops\. You can see three years on the board of trade, you have transparency to where our prices, so farmers, if they want to hedge, if they wanna think about selling a part of their crop into the future, they can do that\. And, and we can all agree, okay, over the next three years, this is what that rental income will be\. But when you think about other, like across a farmer’s portfolio I mentioned they own land and they intend to own that forever\. You know, that’s how they think about it\. And they rent our land and those are usually three year leases, but then they rent a lot of land from other people\. Those other people, even if a farmer’s been operating that land for 30 years, it’s usually 31 year leases\.

00:33:30 Really\. So making decision because the landowner, I’m not gonna say they’re not sophisticated, but they’re unwilling to do a multi-year lease because they want to have the optionality to sell the property free and clear of a lease if they decide they wanna sell it\. So usually when farmers look to us, they’re saying, well, we want to add a new combine or a tractor or make these overhead or hiring or infrastructure decisions\. They actually view a three year lease as a long term lease\. Huh\. In, in the farmland space, we have some leases that’ll go eight or 10 years if they’re growing more specialty crops\. So we have about 20% of our portfolio that generates higher revenue because they’re growing things like potatoes for potato chips, processing tomatoes\. The, the kind of highest quality mint you can grow in the world is in the Midwest\. So we grow that on our properties and that requires a more diverse rotation and a longer planning for the farmers\. So we’ll allow a longer lease in those instances and we allow that because they’re paying us a stronger rent\.

00:34:29 \[Speaker Changed\] Huh\. Really, really kind of fascinating\. I wanna talk about scale\. You mentioned bolt-ons and a lot of things\. I’m kind of fascinated by the scale\. And the question I wanted to ask is, are each farm that comes up for sale, do they have the same or different value for different acquirers? Like I’m gonna assume if you’re the adjacent farm that next farm might be more valuable\. You spend a lot of money on combines and tractors\. Hey, if you can use it on 500 acres instead of 300, you’re, you’re cost per acre should go down\. Of course\. What, what’s the impact on scaling up and what’s a big farm? Is a hundred acres big? Is a thousand acres big?

00:35:15 \[Speaker Changed\] Yeah, I mean it’s all relative\. But in to your point about are there different values for different buyers? Absolutely\. Even if you, even if two buyers both intend to farm it, there are absolutely differences in how someone will value it\. In some cases on the same land, it comes down to what crop do you intend to grow? Huh\. So I had talked briefly about specialty crops, but if, if you are, if, if there’s a farm in northern Indiana with irrigation that comes up, if the, the tenant we’re looking at wants to grow corn and soybeans, they’re gonna be able to pay us one rent\. If the tenant we’re talking to would grow popcorn and processing tomatoes or potatoes, they can pay us almost double this rent on the same land\. So when we look at farmers, we’re trying to identify which farmer can generate the highest revenue, has a strong balance sheet, operates with the least amount of risk so that our rent will be paid every year in the spring\.

00:36:07 But there’s, you know, it’s really important when you look at land to determine what’s the highest and best use even just on the agriculture side\. So when you think of every farmer would love to have a thousand acre blocks of land in the Midwest, that’s hard because the history of ownership was the Homestead Act\. Right? So it’s 40 acre blocks\. So within our portfolio we have 40 acre farms and we don’t love doing those transactions\. But if we can bolt them onto an existing property with an existing lease and the same farmer, that’s kind of a no-brainer\. But our largest farms in southwestern Georgia, it’s 7,000 contiguous acres\. Wow\. So that’s about 10 square miles in one piece\. It’s all irrigated\. And the history of ownership there is plantations out west, the history of ownership were ranches\. So these larger tracks of land, you tend to see more institutional investment in those areas along with permanent crops\.

00:36:57 And there’s a lot of reasons people will tell you it’s around scale and efficiency\. In some cases I think it’s just you can write a bigger check\. If I need to deploy 50 million at once, I can do it better in those areas ’cause the farms are just bigger or it’s a permanent crop that it’s a hundred or $200,000 an acre so I can deploy capital more quickly\. For us, it’s harder to gain that scale\. But it really starts with that tenant network\. So those 170 farmers we work with today, they farm our 170,000 acres or 180,000 acres, they own collectively about 250,000 acres that I don’t expect they will sell, but that’s kind of what they own\. But they rent over 750,000 acres from other people\. And those other people are those estates trust, non-farming heirs\. And when those folks wanna sell, usually they don’t have a public auction\. Usually it’s a private transaction, the first person they call is their farm tenant\. And while we would, if our fund was closed, we would love to see prices just continue to escalate up forever, you know, over time\.

00:37:59 \[Speaker Changed\] But you buy or also, but you are on both sides\. Yeah,

00:38:01 \[Speaker Changed\] We like cycles\. So when farmers have really strong balance sheets, like in 2021 and 2022, they were probably not passing on as many of those purchase options to us\. But now we’ve, we’re in our third year of lower commodity prices, farmers have to be careful about how much working capital they’re gonna liquidate to go buy a long-term asset\. And if it’s a very strategic farm to them, they’re gonna try to buy it very close to home\. But if it’s something they’re willing to travel for and they’ve, they’re currently farming and as much as they’d like to grow their acres, to that point about efficiency, you mentioned they don’t wanna lose acres\. So if a farmer farms 5,000 acres, if one of their landlords who owns 500 sells and they don’t, they’re either not able to buy it or, or someone that we’re partnering with them on, if they’re not able to buy it, then they just lose those acres and they immediately become over capitalized\. Every other acre becomes more expensive to farm

00:38:55 \[Speaker Changed\] Per per

00:38:56 \[Speaker Changed\] Acre to farm\. And so they think about it in terms of protecting acres and growth\. When you say, well why would they partner with someone like us? So when we look at farms, that would make sense to add to the portfolio\. In some cases we’d pay a little more because it’s a strategic farm that’s close by, but we say no probably 29 times outta 30\. Really, when we’re at a public auction, the hit rate is low\. And while we’d like that to be higher, that’s the investment discipline we right\. We will lose sometimes by 40 or 50% above our reserve price\.

00:39:25 \[Speaker Changed\] Back to Graham dot Abso\. Absolutely\. You mentioned ranch ranching\. We’ve been mostly talking about farming\. When I think of ranches, I think of cattle farms, horse farms, sheep\. What do these ranchers do? How much of the assets you own are ranches versus farms? Yes\. Or is there a mix? Some do a little bit of both\.

00:39:45 \[Speaker Changed\] Some can do both\. Not our farm\. So our portfolios exclusively farming, not ranching acres\. You tend to see those ranching acres\. You know, if you think of what’s the highest and best use, if you could grow amongst row crops, even corn is the highest revenue, then soybeans, then we, I mean, cotton would be up there as well\. But as you look kind of down the value cycle, ranching would be very low because you’re, you’re just not generating much rent\. So it’s more marginal land that’s used for that\. Or larger tracts of land\. Typically, like one of the big farmland owners is the Mormon church\. They’re also one of the five largest cattle feeders in the country\. So they own a lot of ranch land\. So they, where

00:40:26 \[Speaker Changed\] They’re actually grazing cattle, so they’re gonna feed and then sending it to their own cattle\. Yeah\.

00:40:29 \[Speaker Changed\] And they’ll graze the cattle and then eventually, you know, take that all the way to market\. That’s the type of vertical integration you’ll see in some areas\. And row crops, you just don’t see that\. We like to identify tenants we’re working with that if they have a dairy, so they need the land to feed the cows, they need the land for their nutrient management program\. Those tenants are willing to pay more for farms\. If it’s a strategic farm that’s close by because they can’t travel all over the place\. But a lot of our tenants, they might have a home base that kind of looks like the center of this table and the radius that they’ll travel, being willing to farm, you know, they’ll rent in these other areas if they can find enough acres to have scale\. Because ultimately every time a son or daughter wants to come back to the farm to help increase that family business, you can’t just slice the pie more ways you have to grow the pie\. And I mentioned earlier, the amount of total acres in the US is going down every year\. And in the Midwest you don’t have problems of aridity or erosion, but you have a lot of development pressure coming in\. The cities are expanding, manufacturing’s, expanding\. So there are acres that farmers lose for, for those reasons every year\.

00:41:37 \[Speaker Changed\] So it seems absurd to talk about farmland and artificial intelligence, but there are two different ways I want to go with this\. The first is these giant data centers, they pay a lot more\. They are a higher spending buyer or renter than say someone growing row crops\. What’s the relationship between farmland and AI and big infrastructure investing?

00:42:05 \[Speaker Changed\] Yeah, I mean we’re seeing it firsthand now in the Midwest\. The amount of additional building that’s happening around data centers is unbelievable\. And the, the amount of capital that’s being invested in, in these areas like Ohio, Indiana, Michigan, Illinois, around data center development, it’s really staggering when you think about it\. So there’s just outside of South Bend, Indiana, two very large data center projects that I think each is investing between nine and 11 billion on these data centers\. Wow\. And the real estate price, even if it’s, I think our average cost per acre across our portfolio is about $8,000\. You see data center prices anywhere from a hundred to $300,000, 10 an

00:42:45 \[Speaker Changed\] Acre x, 12 x\. That’s crazy\.

00:42:46 \[Speaker Changed\] Yeah\. At least if not more\.

00:42:48 \[Speaker Changed\] And who are these? Who are the companies that are these big buyers? All the big names we know\. Yeah,

00:42:52 \[Speaker Changed\] It’s the big ones that are out there\. I think you see

00:42:53 \[Speaker Changed\] Google, Microsoft, who else is,

00:42:57 \[Speaker Changed\] Yeah, groups like Amazon\. It’s, it seems like what you’re finding now is a lot less hoteling space for data centers\. And they’re all single user and it seems like they’re going after the best locations, which would be large tracks of land close to infrastructure\. So you want natural gas, you need three-phase power with capacity on the line\. You need fiber lines or rail access to run fiber water and you need water\. Yeah\. And that while there are multiple ways for cooling water, whether it’s closed loop or open loop is a big part of all of it\. So it you, what you tend to find are a lot of these old rust belt areas, but, but kind of virgin farmland is the best candidate for it\. And you have these single users that are going after that land\. So in our portfolio we’ve aggregated large properties over time and there seems to be a lot of interest around that because it’s just, there are very few of these places where you can do it\. It’s not like a, even a distribution center that next to every exit on the highway, you could justify putting one there\. You need all the energy and water infrastructure and fiber infrastructure and you need capacity\. So every new, and there aren’t a lot of new natural gas fired power plants that get built\. But when one gets built, it seems like a logical kind of co user of that power would be one of the,

00:44:16 \[Speaker Changed\] I gonna say, what about co-location where you just run a, that gas line and build your own electrical facility adjacent to one of these power plants\.

00:44:23 \[Speaker Changed\] I feel like some of that is definitely happening and will continue\. I mean, ultimately some of these data centers will all be powered by modular nukes when when you get down to it you need

00:44:32 \[Speaker Changed\] Thorium\. Is that what we’re talking about?

00:44:34 \[Speaker Changed\] Potentially? Yeah\. Yeah\. I mean the idea of when a data center’s going in or even a big manufacturing facility, sometimes you’ll see co-location of solar and while solar has a lot of benefits, it’s not gonna power something like that\. Right\. That’s more just, I think for credits to sell into the grid\. I mean, we have three mile island potentially coming back on\. So there’s a lot of different options\. And I think across states like New York State, they’ve closed down some nuclear facilities or consolidated\. I,

00:45:02 \[Speaker Changed\] Well, Shoham never opened here\. They spent billions over 20 years\. There was no escape route\. Bad islands are not great places for nuclear facilities\. But you know, you see countries like France, 90 plus percent of their power generation comes from nuclear\.

00:45:18 \[Speaker Changed\] Right\. And the hard thing, when you think about power, I mean, I, I kind of laugh\. I had two siblings that both went to Cornell\. So I’ve been to Ithaca quite a bit\. We own farms in upstate New York\. And every time I driv