(intro)

Welcome to The Gold Collar Investor Podcast, with your host Pancham Gupta. This podcast is dedicated to helping the high-paid professionals to break out of the Wall Street investments and create multiple income streams. Here’s your host Pancham Gupta.

Tom Burns

Hi. This is Tom Burns, author of Why Doctors Don’t Get Rich. You’re listening to The Gold Collar Investor Podcast, with Pancham Gupta.

Pancham Gupta

Welcome to The Gold Collar Investor Podcast. This is your host Pancham. I really appreciate you for tuning in today. My guest is David Chan on the podcast. He is the Head of Business Development and Founding Team Member of FarmTogether.

David has over seven years of experience in finance and technology across agribusiness. He holds an MBA from Harvard Business School and a BS in Atmospheric Sciences from Cornell University’s College of Agriculture and Life Sciences. Prior to joining FarmTogether, David was a Senior Private Equity Associate at AMERRA Capital Management, an asset manager that specializes in ag investments. He previously worked at Prudential Agriculture Investments, Gro Intelligence, & Barclays Investment Bank. David is also a member of LeadNY class of 2019, a leadership program managed by Cornell for committed leaders in the agriculture and food sectors.

(interview)

Pancham Gupta

Hey, David, welcome to the show.

David Chan

Hi, Pancham. Thanks so much for having me.

Pancham Gupta

It’s great to have you on. Are you ready to fire up my listeners break out of Wall Street investments?

David Chan

Well, I just got back from a trip to Puerto Rico, visiting some farms there. So, I’m going to respond in Spanish and say estoy listo.

Pancham Gupta

Awesome. I don’t know what that means. But I’m sure that means let’s do it. Alright. So, David, why don’t we go over your background, how you got into FarmTogether and the idea behind it? What were you doing before that?

David Chan

Yeah, absolutely. My path to agriculture is a little circular but also a little bit meandering. I grew up in New York’s Hudson Valley, surrounded by agriculture. I’ve worked on farms when I was young. I was very familiar with certain crops just by virtue of where I grew up, particularly apples. But I never intended to work in this industry. I have always been interested in weather. Growing up there, I was able to witness everything from tornadoes, to blizzards, to my personal favorite which is thunder snow — that’s when it thunders while it’s snowing. It’s a pretty amazing phenomenon. That’s what I want to study in college. So, I pursued a degree in atmospheric science from Cornell.

I expanded my interests beyond just weather to also climate. I became very deeply involved in climate change research. I came to the conclusion, during my undergrad years, that we basically know what we need to know about climate change. Industries need to respond, and certain functions need to respond. When I say that, I mean public policy, regulatory, and private sector.

I was most interested by what the private sector could do. And so, I wanted to build a domain expertise in finance and work at companies that I thought would be in the arena dealing with climate. I started on Wall Street. I joined an analyst program at Barclays Investment Bank. That’s where I built my fundamentals and just the hard skills that you would expect — the Excel funky skills, which everyone uses for a long time. I still use them today. When I was ready, I felt like I had developed a really sound skill set there, I was ready to turn into agriculture.

I picked agriculture as the industry that I thought would be at this intersection of investments and climate for one reason. That’s because there’s a circular relationship with the way we farm and climate change. The way the climate is changing is going to impact what we grow where. The way we farm can impact the climate, either positively or negatively. I can’t think of any other industry that has that type of circular relationship.

In addition to that, agriculture is an industry that I would say many people don’t think much about. It’s taken for granted. It’s forgotten. It’s under invested. It’s inaccessible to many investors. And so, I thought it was the perfect industry to develop an expertise. I joined a early stage company called Grow Intelligence. At that time, they were a seed-stage tech company, building artificial intelligence for agricultural analytics, for policymakers, for investors. I was very early on there. I think I was the seventh employee. Grow is doing great today. I think there’ll be on their series B or C. They continue to make an important difference in the world, in agricultural data and predictive analytics. So, very proud of my time there.

Then I transitioned from Grow to business school. Because I did not have a formal education in business or finance, I thought I would benefit a lot from that business education. And so, I received my MBA from Harvard and used that as my transition point to bring those two experiences together and look at agricultural investing. I joined a private equity group out of Harvard called AMERRA Capital, where I invested in agribusinesses for a little over a year before meeting Artem Milinchuk, who is the founder of FarmTogether.

I eventually joined FarmTogether. I wanted to become a client, because I wanted to add farmland to my portfolio from all the reasons that we share with our investors. But Artem had a different investment in mind, and I ended up investing with my time. I’ve been at FarmTogether now for almost four years. We have, I think, made a big difference in making farmland a more accessible asset class to investors.

Pancham Gupta

That’s quite a journey. Thank you for sharing that, David. So, let me ask you this. When you went to Harvard and joined this private equity firm, what was the goal at that time when you were at that private equity? Was it more agriculture-related private equity company?

David Chan

We were an agribusiness-focused private equity firm. So, we invested in midstream companies in the agricultural value chain. Typically, processing companies. We also invested in aquaculture companies. But typically, midstream value chain just means one level lower than the farm gate level on the value chain. An analogy could be for corn, soy, or wheat, investing in businesses that had storage capabilities, hauling capabilities, even milling capabilities in order to get raw corn, soy or wheat into a feed format that could then be sold to food or feed or even to customers.

Pancham Gupta

Got it. Then you met the founder of FarmTogether. Was FarmTogether already in business, and was it already doing offerings and raising capital to do certain things?

David Chan

At that time, FarmTogether had been in the business for about a year and a half, but no offerings. No capital deployed. Zero AUM. It was the frontier.

Pancham Gupta

Wow. That’s awesome. Let’s discuss that journey for the listeners. What is FarmTogether? Let’s start with that. What’s the idea behind it, and where are you guys now?

David Chan

Certainly. FarmTogether is a tech-enabled asset management company focused on making investments in farmland more accessible for both retail and institutional clients. When FarmTogether started to make offerings, our initial product was crowdfunded deals. We still offer crowdfunded deals to this day. Crowdfunding is a model that was born into inception through a piece of legislation called the JOBS Act. Crowdfunding has now been around for, I would say, coming up on a decade, I believe.

Pancham Gupta

Yeah, it’s a decade. 2012 was the time, yep.

David Chan

I think it’s a pretty familiar model for investors who maybe have seen real estate investments, that I think real estate may have been the first asset class to be structured in crowdfunding offerings. But the spirit behind crowdfunding is taking large, typically illiquid assets that on their own are maybe out of hands or out of sight for many investors, because the capital that needs to be committed is so high. In these offerings, you’re able to fractionalize ownership and make the minimum investment amount much, much lower. Thereby making a historically large illiquid asset class a little bit more accessible to more investors. That’s the fundamentals behind crowdfunding.

Today, we offer additional products as well. Now we have a diversified fund option called the FarmTogether Sustainable Farmland Fund. That’s a great option for investors who are looking for diversification among their farmland allocation. So, that is one option available. We also offer Tenant-In-Common structures, which can be very helpful for investors who may have a real estate sale and are looking to participate in a 1031 exchange. Finally, we also offer custom solutions which are akin to a separately managed account. We call those bespoke offerings. Those are either solely owned property or a solely owned portfolio of properties. Our product offerings have expanded beyond crowdfunding. But in the early days, for our first couple of years, we were just doing crowdfunded offerings.

Pancham Gupta

Got it. How many assets in the management do you guys have now?

David Chan

Today, I believe we have roughly $180 million in assets under management. That is comprised of roughly 40 properties across those different products.

Pancham Gupta

Got it. That’s great. Let’s dive a little bit deeper into this. To anyone who’s listening, FarmTogether basically is offering opportunities to the investors to invest in farmland. Really, different kinds of farmland. In return, they get the return on their capital — we’ll discuss a little bit on that — and, I guess, diversification outside of different other asset classes that they might have invested in.

David, let’s start from the basics. How do you, guys, source land, number one? What kind of opportunities, or what kind of things that you like that you think that you have expertise in? Do you have all that in-house, that management side of things? Do you hire third-party management companies to actually take care of the growing side, and then eventually harvesting it and selling it off? Let’s start from the entire lifecycle of this. How do you source land? What kind of land, and what kind of product? Who manages it? What’s the lifecycle after that?

David Chan

Certainly. Our sourcing and underwriting is all done in-house. We have specialty in permanent commodities. When I say permanent, what I mean there would be farms that have long-lived assets on those farms — a tree or a vine that is going to be producing a commodity for an intended economic life of 20, 30, or maybe even 40 years. That differs from row crops or annual crops, where you’re basically acquiring just bare land and then planting every single year in some mix of annual commodities, which will be corn, soy, or wheat. But there’s no long-lived asset on that field.

We have a deep expertise in permanent plantings, particularly in the Western U.S. Our team has a deep understanding of that geography, and the challenges and opportunities that come with it. An example of a challenge would be, in the West Coast, water is probably the top thing that comes to mind. In California, understanding water rights and riparian rights and fairly recent legislation, which is the Sustainable Groundwater Management Act (SGMA), and also understanding—

I think everyone always thinks about drought in California because it’s depletion. It was until we saw the recent rains, although California is still technically in a drought. But even in California, there’s also the risk of flooding, understanding whether or not a property has proper drainage and tiling, and is well equipped to drain properly after heavy rainfall. In the Pacific Northwest, in Washington and Oregon, flooding is — they switched spots. Flooding is the first concern on the west for those areas of the country that tend to get too much rain. So, we’re looking at, again, the drainage and tiling that’s in place.

We also do have in-house row crop underwriting expertise. We have a row crop specialist as well. They were typically active again in the western part of the US, but also in the Midwest. We source deals from a variety of sources. We have many deals that we source off market, that are brought to us either because owners are aware of FarmTogether and want us to evaluate a potential transaction. Or because we’ve worked with lots of different operating partners and industry leaders, so they’re aware of properties that are coming to market before they’re listed with a broker. We also do look at public-listed properties as well.

We have an in-house technology tool called Terra, which helps us scale our underwriting. Think about different important variables when we’re using Terra leveraging technology to really help us accelerate our underwriting process. That could range from, again, understanding a particular water district or a sub-basin, understanding whether it’s in an aquifer that’s positively discharging or a negative depletion, understanding the grading of a property. Lots of different type of factors. We got it.

Pancham Gupta

Well, one question. Is there a minimum size that you look at? What are some of the buying criteria that you have in terms of the size?

David Chan

Typically, we’re looking at deals that are at least a million or $2 million in value. I would say that tends to be around the floor. We like to look at properties all the way up to around $15 million. That tends to be our buy box. We’re most active there for a couple of reasons. I think that’s where we see a lot of opportunity. Smaller deals that are much below a million dollars tend to be very competitive among individuals and tend to be acquired through auctions. Larger deals that are in excess of $50 million tend to also be competitive but among institutional managers. And so, we see our area sort of sweet spot are $5 to $10 million. It’s a really interesting deal size where we see a lot of opportunity.

Pancham Gupta

Is there a minimum acreage you also look at, or that’s not really effective?

David Chan

That’s not as applicable per se. But typically, row crops, that would pencil out to be a minimum acreage of around 200 acres. Then permanent, it really spans the gamut. Because depending on what you’re looking at acquiring, permanent commodities can range from $20,000 bare land, a tree nut property to $60,000 mature specialty commodity. When I say mature, pistachios or even avocados. So, it’s a very wide range. But I would say, it probably would pencil out to a minimum of about 50 acres there.

Pancham Gupta

Got it. I know you mentioned California. Do you also do southeast of U.S. like Florida and other states?

David Chan

We’re not active in the southeast yet, but we are exploring opportunities in that area. I could certainly see, in medium term, looking to expand our portfolio to those areas. Right now, we’re active along the west. So, Washington, Oregon, California, Idaho. We are in escrow for our first property that is in Colorado. We also have properties in Nebraska, and Illinois, and Oklahoma. I think we are hoping to expand it to Texas in the near term as well. So, I would say, heartland west is where we tend to focus.

Pancham Gupta

Got it. What kind of different things, for the listeners, you have grown or you have invested in so far? Is it more nuts or fruits? Where are you invested?

David Chan

Across the board. We have a pretty broad diversification of commodities. We’re invested in — I would say about 20% of our portfolio is in row crops. Again, that would be annual commodities that are planted every year like corn, soy, wheat, legumes. Then the 80% that’s permanent or specialty commodities really spans the gamut.

In tree nuts, we’re invested in pistachios, almonds, walnuts, pecans, hazelnuts. In citrus, we’re invested in lemons, Tango mandarins, Cara Cara navels, clementines. Then in apples, we have a couple of different varieties. Cosmic Crisp is a fairly new and popular one. Then we have some specialty-licensed controlled varieties as well. In the apple space, we have pears. We have wine grapes — again, both red and white grape varieties. My personal favorite is Albariño. It’s a white. Very good. Then beyond that, I think we’ve covered a lot of ground. But I think those are—

Pancham Gupta

What about avocados?

David Chan

Those are the big ones. Avocados, we are interested in the States. We’ve looked at several properties. They tend to — depending on the area of the world that you’re in and depending on where in California, the land bases can be very high, especially if they’re Central Coast. So, we’ve passed on all of the avocado deals that we’ve seen so far. Because we could not get ourselves comfortable with the valuation, and we have a certain hurdle that we like to achieve for our investors, particularly on the appreciation component of return. So, unfortunately, we haven’t seen anything that’s penciled out for avocado yet. But it’s definitely a space that we are interested in. I do think that we’ll have some avocados in our portfolio at some point in the future.

Pancham Gupta

Got it. I didn’t hear oranges. Florida is a land of oranges. So, I guess—

David Chan

I would disagree. I think California is the new land of oranges.

Pancham Gupta

Oh, really? Okay.

David Chan

Florida has battles, a greening disease, unfortunately. Also, I think Florida orchards, many of those citrus orchards there, in addition to the greening issue, have been faced with obviously hurricanes and some other issues. While there is still a very prevalent citrus industry, in Florida, it tends to be more for the juice market. California is now the leading producer for the fresh market. California has done a really strong job of limiting citrus greening disease from spreading and impacting orchards there. For the fresh market, I would say California is the leader. We do have oranges as well. I just forgot to list those in the basket of citrus fruits that we’re invested in.

Pancham Gupta

Got it. That’s very interesting. So, let’s talk about the operation side. I’m assuming the people who are selling between the $5 to $15, $20 million range, they are still more mom-and-pop as opposed to institutional sellers, right? So, it’s probably second, third, fourth generation wants to get out. They have some kind of operations going, but they’re not satisfied. They’re ready to move on. Do something else, basically. Do you buy those? First, is that true? Second, if so, do you buy those and get operating partners in? Or you do deal with them, the ones who are on the ground, and retain their staff and take it over that way and operate it?

David Chan

Yes, and thank you for reminding me because I did not answer a part of your question from earlier. For asset management or property management, we do contract that out to third parties. So, we have operating partners who do the actual farming on the properties in our directly-operated structure deals. We also have other structures which are leases akin to real estate leases, where we would lease the property to a tenant. Then the tenant is responsible for farming, of course. The tenant would pay us a rent, which is distributed to our investors as a rental-based cash yield.

We have in-house an asset management team comprised of growers who oversee and supervise our third-party operating partners, just to ensure that all of our farms are being adequately serviced, and that there are no issues that we may be unaware of. But we do work with third parties for the actual farm management on site. I would say, in respect to those operating partners and who is selling property, sometimes it’s actually operating partners. So, operating partners tend to be larger balance sheet businesses that may manage thousands of acres.

An example of one that we work closely with is Stemilt Growers who are a large apple producer — I believe the biggest organic apple producer in Washington State. Their family business as part of their balance sheet has a heavy investment in farmland. But they would directly manage their businesses being out for family’s behalf. Similar to any other family office or investment group, they go through periods where they evaluate the market. They evaluate their balance sheet, and sometimes they need to rebalance. If they find that they are too allocated to hard assets or too allocated to land, they may look to sell some assets from their portfolio, either routine, often retain management. So, they’ll work with us — to either be hired by us as a manager or to lease the property back from us. That would be a sale-leaseback. That happens quite a bit.

Or the other scenario, which you’ve mentioned, is that it’s a family that’s looking to sell the asset for a variety of reasons. Often, we do see lots of estate activity. A family will be going through an estate sale process, and often will have one or more farms in their estate. Often, what we see would be the children who would be inheriting the properties can’t come to an agreement on whether or not they all want to continue to own the farm or continue to operate the farm. Typically, a solution for folks who are in that position and are looking at least have some heirs looking for liquidity would be to sell a majority of the equity in that land to an outside buyer. And so, we do purchase farmland often from private sellers who are families, or individuals, or estates going through a transfer process.

Pancham Gupta

Got it. It’s quite interesting, you know. We are in a real estate space, in multifamily. We have third-party operating partners. We have a certain kind of criteria around for our business that we try to prefer, like a local asset manager and all that. Do you try to find land where you already have established asset, like operating partners and who you know would go there? Or do you first find and then you find the operating partner? That’s question one. Second, do you have certain kind of, in your industry, fixed management fee regardless of the crop? Or is it like it varies based on the fruit or the nut that you’re growing, but it’s fixed as far as it goes around that particular asset, or fruit, or nut?

David Chan

Sure. For the first question, operator availability and network is part of our underwriting and sourcing philosophy. We are only interested in areas where we know that there are not just one but several highly capable and qualified operating partners available to service the asset. The reason for that is, you could have the best farmland in the world or in the state. But if you don’t have a high-quality operating partner to take care of the land, you’re never going to generate its full potential. And so, that’s key for us.

Our underwriting process and sourcing process starts with, who are the operating partners that we’ve worked with and that we know of in that area, and do we feel comfortable and confident that there are a sufficient number available to manage that asset? To your second question on fixed management fee, just to clarify, do you mean a fixed management fee between us and the operating partner?

Pancham Gupta

I know the sale-leaseback model is different, where you just lease the land to them. They take care of everything, and you get the rent for that land. But in terms of it, you’re actually the owner of the land. You’re taking the farm, like the harvest and all that. How does that work? Is it more of a equity ownership, or is it more of a fixed management fee, or is it based on the amount of produce that’s produced in the season? How does that work?

David Chan

I’m just going to explain two different fee flows for clarity’s sake. With our operating partners, we typically have a fixed service fee or management fee per acre, that we hire them to do the farming on a per acre basis. That’s what the fee is for a given crop year. Then in addition to that fee, we bear costs that are used or incurred on the property for treatment of the property. Beyond that fee, obviously, if any fertilizers are applied, or any other inputs, or if there’s any sort of capital improvement that’s being undertaken, obviously, that would be the owner’s or our responsibility to fund.

Pancham Gupta

And the payroll as well, right? Like the payroll of the employees?

David Chan

No, because we’re contracting that out to a third party, the third party is responsible for the payroll. Obviously, they’re charging us that management fee to cover their labor expense. That’s how that’s covered. But those are not our employees. Those would be the—

Pancham Gupta

No, I know they’re not your employees. But in your P&L, do they charge a separate bill? In our industry, it’s separate. Even though they are actually on their payroll — meaning, they are giving them W2s — but it’s a P&L on the property. It’s on top of the management fee that we pay, that expense. So, it’s an expense to the property.

David Chan

It is an expense to the property. But, again, that’s baked into the management fee. So, you could itemize it out if you wanted to know what the labor expense is, of course. But it’s customary in our industry to just include that in the management or service fee that we paid to the operating partner. Then on the other side, FarmTogether generates fees from both acquiring and structuring these deals and then managing these deals for our investors. And so, between FarmTogether and the investor, we do charge a management fee and often a one-time fee, which is realize that acquisition it’s similar to like a closing fee. Sometimes there’s a variable fee component as well, like a profit share or a revenue share component.

The returns that we share both under performance and when we market new offerings are always net of all fees and expenses. Those returns would be net, both the fees paid to the operator — that management or service fee that we discussed first — as well as net any of our fees, our management fee, our one-time fee. All of that.

Pancham Gupta

Got it. So, let’s move to the final part of this process. Once now the operating partner, you bought the land. You have the operating partner. They are operating the property. Now they’re harvesting the crop. I’m not talking about sale-leaseback but where you are actually using all that thing. How does the supply or the distribution channel work on that side? Do you just lead into, that’s part of the management agreement?

Do you just work with the operating partner to use their distribution channel and part of their wholesale inventory that they have from their own stuff? Or like you were mentioning about, this apple growers, they just add it to their inventory. They gave you whatever tonnage or produce that’s produced. You get that for whatever the price is. Or do you get that and all that produce yourself, and then you actually sell that on your own separately by putting it in the warehouse, and then creating your own distribution channel and all that?

David Chan

Yeah, certainly. To answer directly, our operating partners manage our marketing efforts. It’s very important. Why? I would say part of what we are hiring our operating partners for is not only their expertise in agronomy and actual farming, but it is for their marketing expertise as well. Marketing differs greatly, not only from commodity to commodity but from variety to variety. We really depend and rely heavily on our operating partners on their marketing strategies and distribution channels in order to get the best price for our investors.

We do work with our operating partners to develop a marketing strategy. What I mean by that is, with some commodities, it’s customary to either sell the commodity at one point in time or to do basically a staged or a batched distribution timeline, which we call pooled marketing. The advantage of pooled marketing is that, especially in markets that could be volatile for a number of reasons. 2022 is a great example of that. I think most markets were pretty choppy. In our space, that was heavily influenced by the war in Ukraine. We elected for pooled marketing in order to try to smooth out some of that volatility and not run the risk of contracting all sale of all product at what might be a cyclical low just due to timing.

We work with our operating partners on decisions — whether to do a pooled strategy, whether to do just a one batch sale process. But in terms of actual marketing relationships and distribution channels, that’s part of why we’re hiring our operating partners. It’s certainly among the questions that we asked them when we interviewed them when we’re deciding on who to hire.

Pancham Gupta

Got it. So, it’s really, once you have them on board, you treat them as your partners. Then once you have the produce, they basically allocate that percentage or whatever that is for that particular. Because the example that you gave from Washington, that company — I forgot the name.

David Chan

Stemilt Growers.

Pancham Gupta

Yeah, those guys have their own produce. If you have to have farmland close to theirs, they will probably take all that produce and have it in the same batches, right? So, there is obviously some accounting done at the back end where you make sure that this is allocated to your farmland, and that’s how you get your P&L separate.

David Chan

Certainly. That’s what our asset management team, that’s part of their responsibility, our in-house team. Those are folks who are FarmTogether employees. They do run audits and checks on what we call pack out slips or basically the receipts for what has been grown, what has been harvested, and what is going to distribution. We operate on a trust but verify model where, of course, we want to ensure that there’s no issues and everything that’s been collected from our properties were being credited for. That’s not an issue ever. But we do have to trust then verify for our investors. That’s what our asset management team does.

The benefit of working with an operating partner like Stemilt Growers — who are very large and who do produce, again, the most organic apples in North America — is that they have relationships with all of the large buyers, any grocery. Pretty much any grocery you can think of, they probably have a relationship there just anecdotally. I know just before we started the show here, we learned that you lived on Long Island for a long time. I currently live on Long Island. So, I’m on the East Coast.

I’m very far away from Stemilt Growers where their operations are in Washington State — opposite coasts. I was running down my block probably about a year and a half ago. I noticed a logo that was familiar to me. I looked at what it was. It was a Stemilt Growers’ apple box that one of my neighbors was recycling. I just thought it was a really funny anecdotal point. But really funny to see the breadth of the operating partners, distribution channels, and how far produce, that’s grown on our orchards, across the country is being delivered.

That is why it’s really important that we — going back to the question on how we source, it’s very important and critical for us to consider which operating partners are available to serve as assets. Because again, you can have a great fundamental asset, a great farm. But if there’s no one there with the expertise to farm or with the relationships to distribute, you’re never going to achieve its full potential.

Pancham Gupta

Absolutely. Before we started recording, I didn’t think that there would be so many operating partners out there for this kind of industry. But now I think of it, why not? So, you have to pick the best ones and work with them. I have taken a lot of your time on this round. I usually have 30 minutes. I have so many more questions, but I’ll leave it there.

Do you have anything that you would like to add to this? Typically, if I’m a listener, one thing I didn’t cover which I usually do is if you can share with us some numbers if you have a deal that has gone full cycle, if you have any. I know typically, the lifetime is longer for these kinds of products. So, if you can share some numbers with us on how much you bought it for, and what kind of returns investors are seeing, and where is it, and what kind of farm, that would be great. Then we can move on to the second part of the show.

David Chan

Yeah, certainly. Unfortunately, I don’t have anything that has been a full-lived deal for you yet. Our first deal is expected to reach its full life in 2024. So, we’re close but not quite there yet. But what I can share is, in our space, we’re typically underwriting 10-year hold periods, give or take. We have some deals as short as 5 years, which was at first deal. Then a couple at 7 years. But often, I would say 10 years. We even have a couple of deals that were a bit longer than that, 11 or 12 years.

The reason for that is because farmland is a long-term hold. The only way to capture as much value out of a farmland as an investor for their investment needs is to hold the asset long enough to accomplish a value creation plan. So, we’re dealing with biological assets — trees, vines. It doesn’t matter. You could have the best human capital in the world. You can have the best farmland in the world. We don’t know how to change time.

Many of these assets, they have a development component, or they’re not fully mature yet. We are waiting for enough time to go by to have a mature asset that’s producing a mature cash yield, for at least a couple of years, for our investors to enjoy it before capitalizing on any realized appreciation and selling the asset. That is why we tend to have roughly an average hold of 10 years.

Then we also have two different, I’d say, sub-asset classes in farmland. Again, permanent commodities, long-lived assets — trees, vines. That, we’re underwriting for 20, 34-year economic life cycles. And row crops which are bare land assets that are planted annually to corn, soy or wheat. Inherently, there’s much less risk in row crop because there’s no long-lived asset there, and there’s no storage of value in a tree or storage of value in a vine that could be impacted by weather, could be impacted by disease, or a number of other risk factors.

Also, these are markets that tend to be more specialized. You can’t grow almonds in many parts of the world. You can’t grow wine in many parts of the world — wine grapes that is. And so, there tends to be much higher margin in these markets as well. The yields are very different between the two. Row crops, we’re typically, right now, underwriting at around 7% net IRR and around the 2% net cash yield. That cash yield component can obviously change year to year based on where interest rates are.

In the permanent side, we’re typically underwriting deals of 10% net IRR. Cash yield is typically around 6% or 7% net. Overall, a higher yield profile than the row crops. But again, the yields are higher because there’s inherently more risks as you’re dealing with long-lived assets that, obviously, are susceptible to any outlier events be it weather, disease, a tractor running into a tree, whatever it may be. That’s where we tend to underwrite right now.

I think for the properties that we have in our portfolio, many of them are meeting or exceeding their distribution targets. We do have a handful of properties that have underperformed in recent years. Largely, those tend to be markets that have been impacted by COVID. So, we have a very long overhang in certain markets from COVID on the supply side. That was really twofold. One, closed ports in Asia. Asia is a big buyer of some of these commodities, particularly some of the tree nut commodities. So, we lost a buyer that is a very big buyer. We had to find other markets for consumption.

Then the other issue that we faced is the container issue — that food and ag faced but other industries faced as well — where we’re seeing lots of shipping issues from the West Coast ports to, often, again, to Asia. We’re starting to finally see those markets normalize. We’re starting to see those issues dissipate. So, we are expecting to get back to where we underwrote cash yields originally. But we did not account for a global pandemic in some of our early deals. Those would be the ones that I think are, today, not quite at where we had anticipated. But we are still bullish that in the long term, we’ll meet and exceed there.

Pancham Gupta

Got it. While you were talking, I have so many more questions on this, but we’ll leave it at that. Just one very quick question. I will ask for my own curiosity. Do you usually get bank debt on these? What is the loan-to-value typically on this kind of deals?

David Chan

Sure. Largely, we’re looking at financing if it’s accretive to a deal. Early on, financing was accretive to many of our deals, because interest rates were close to zero. Now in this new rate environment, financing is less accretive. Recently, we have not been using financing on many of our offerings. And so, we’ve been doing all cash equity financings and new debt. But when we used that in the past, typically, we were using debt very conservatively.

Loan-to-value ratio, typically around 20%, maybe max 30%. We have lending partners where we can access up to 50% loan-to-value with non-recourse debt. So, in theory, that would be the ceiling that we would consider going up to. But again, we only really consider financing if it is accretive to the overall offering.

Pancham Gupta

Got it. It makes a lot of sense. Well, thanks, David. We’ll move on to the second part of the show, but after this short message.

(break)

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(interview)

Pancham Gupta

So, let’s move on to the second part of the show, David. I ask these four questions to every guest on the show. My first question for you is, when was the first time you invested outside of Wall Street?

David Chan

I would say the first time I invested outside of Wall Street, believe it or not, would be investing with FarmTogether. As an employee of FarmTogether, I’ve invested in many of our offerings to date. That would have been my first time investing in something that’s an alternative, that is a Main Street asset. It’s a real asset. And so, thinking of the different deals that we’ve had, it would probably have been an almond orchard. I think my first investment was in almonds.

Pancham Gupta

Awesome. My second question, did you have any fears when you invest in that? I’m sure you probably didn’t because it’s—

David Chan

I didn’t. I was elated to have the opportunity and the access to invest in farmland. I believe very deeply in this asset class and in this industry. And so, it was without hesitation.

Pancham Gupta

Awesome. Do you have any investment that did not go as expected?

David Chan

Yeah, I would say it’s actually my first real estate investment, which is my house. The reason for that is, I was living in New York City for quite a bit of time. My wife and I wanted to move out to the suburbs. This was, of course, in 2020, when COVID was happening and the real estate market was shut down for three or four months.

So, when it re-opened in the summer, we found a house that we loved. It was actually being sold by a real estate agent. The real estate agent was selling her own house. I remember thinking through the buying process, that we’re fools for buying this house. We’re buying at the top of the market because of COVID. But I was comfortable with it because my partner was happy that we were moving out of the city and into a more suburban landscape. Also, I certainly plan to be in this house for a very long time. So, that’s how I came to comfort with it. I never expected home prices to move the way they did after September of 2020. It ended up being actually a really, really strong investment. But it did not go the way I expected. So, that was a positive surprise.

Pancham Gupta

That’s awesome. Everyone should have those surprises, man. Thanks, David. My last question for you is, what is one piece of advice would you give to people who are thinking of investing in Main Street that is outside of Wall Street?

David Chan

I would say a couple of things. I think Wall Street today is trying to find itself again. Public markets are not acting the way that they typically would to various macro signals. I think I would say Main Street, particularly real assets, offer some pragmaticism, offer the opportunity to invest in assets that I think are responding to our economic landscape and environment appropriately and rationally. Personally, I think the 60-40 portfolio is really not relevant anymore. Alternatives are a must in a portfolio that seeks to accomplish diversification.

Beyond that, I would say, consider industries and asset classes that are forgotten. Again, I think agriculture and farming would be one. Just think back to, again, COVID. Going to the grocery store, how many consumers were shocked that we didn’t have fruits and vegetables on the shelves during the heart of a pandemic? It instilled, I think, for the first time, a realization of the fragility of our food supply.

We’re very fortunate that the United States have a very stable food supply. We produce so much of our own food, but it’s still fragile. It still can be impacted by the slightest change in the macro environment. I think that offers a need for investment, frankly, but also a lot of opportunity. Whether it be agriculture and farming or any other Main Street asset class, I would say, think about your day to day and what you go about experiencing as a consumer. Which services and industries are critical to your day to day that maybe justify or warrant a thought on where that service or good comes from? What does the value chain look like? What’s the top of the value chain? Is there a thesis there that makes sense that you can get behind?

Pancham Gupta

Awesome. That’s great, David. How can listeners connect with you if they want to find out more and what you’re doing at FarmTogether?

David Chan

Well, first, I would say to any listener to feel free to check out our website farmtogether.com. Register. We have a learning center that’s available for registered users. That is a great tool for anyone looking to learn more about farmland and historical performance of a farmland as an asset class. As for me, if anyone is interested in learning more or speaking with me about farmland or my experience in the space, please feel free to reach out to me. I’m on LinkedIn, or you can contact me via clients at farmtogether.com as well.

Pancham Gupta

That’s awesome. Well, thank you so much, David, for your time here today.

David Chan

Thank you, Pancham. This was wonderful.

Pancham Gupta

Thank you for tuning in today and listening to David’s story and background, and how they got started in FarmTogether. If you have any questions, do not hesitate to reach out to me at p@thegoldcollarinvestor.com. This is Pancham, signing off. Until next time. Take care.

(outro)

Thank you for listening to The Gold Collar Investor Podcast. If you love what you’ve heard and you want more of Pancham Gupta, visit us at www.thegoldcollarinvestor.com and follow us on Facebook @thegoldcollarinvestor. The information on this podcast are opinions. As always, please consult your own financial team before investing.