Episode #312: Carter Malloy, AcreTrader, “In A Couple Of Minutes, You Can Invest As Little As $15,000 Or $20,000 In A Particular Farm”

Episode #312: Carter Malloy, AcreTrader, “In A Couple Of Minutes, You Can Invest As Little As $15,000 Or $20,000 In A Particular Farm”

 

Guest: Carter Malloy is the Founder and CEO of AcreTrader. Carter grew up in an Arkansas farming family and has had a lifelong passion for investing, agriculture, and conservation. Prior to founding AcreTrader, he was part of an equity investment firm and a Managing Director with Stephens, Inc.

Date Recorded: 4/11/2021     |     Run-Time: 52:36

Summary: In today’s episode, we’re talking all about farmland, an asset that’s historically been hard for investors to access, but Carter and AcreTrader are changing that. We start by hearing how COVID increased interest in farmland from both institutions and private equity firms. Then Carter walks through the process of purchasing farmland through AcreTrader, with Meb’s recent purchase of an organic farm in Nebraska as an example. We hear about the process for you to purchase farmland through AcreTrader, the due diligence process for each investment, and their process for deciding which farm is an attractive opportunity.

Sponsor: Bitwise – The Bitwise 10 Crypto Index Fund is the world’s largest crypto index fund. It holds a diversified portfolio of cryptoassets, including bitcoin, ethereum, and  DeFi assets. Shares of the fund trade under the ticker “BITW” and are accessible through traditional brokerage accounts. Shares may trade at a premium or discount to net asset value (NAV). For more information: www.bitwiseinvestments.com

Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Justin at jb@cambriainvestments.com

Links from the Episode:

  • 0:43 – Intro
  • 1:41 – Welcome to our guest, Carter Malloy
  • 2:30 – The Meb Faber Show – Episode #186: Carter Malloy, AcreTrader, “I Looked At Farmland And Realized…It’s Wildly Inefficient”
  • 2:40 – Update on the farmland asset class
  • 3:39 – The impact of COVID on the agricultural sector
  • 4:50 – Driving factors behind the current farmland valuation boom
  • 7:26 – AcreTrader Farmland Investing whitepaper (Malloy)
  • 7:33 – An analysis of previous booms and busts
  • 8:54 – Why there’s a lack of leveraging in the farmland space
  • 9:55 – Overview of AcreTrader and their investment philosophy
  • 11:18 – What type of farms tend to make their portfolio
  • 13:04 – Revenue model and how their platform works for investors
  • 14:02 – How their farms are scouted and sourced
  • 15:19 – Managing demand and their due diligence process
  • 18:13 – Immediate disqualifying characteristics of potential prospects
  • 19:42 – Why drying up is such a big issue for farmland
  • 22:59 – Understanding soil quality and soil scores
  • 23:41 – Sponsor: Bitwise
  • 24:31 – Will AcreTrader ever step into running the farms themselves?
  • 26:10 – AcreTrader’s recent $12 million fundraising round
  • 28:03 – Where they’re investing their newly raised capitol
  • 30:44 – Meb’s process of using AcreTrader and buying farmland in Nebraska
  • 35:15 – Minimum investments and expected time horizons for holding farmland
  • 36:28 – Potentially shifting to automatic allocating for diversifying exposure
  • 38:33 – Frequency of drops and previews of what may be coming down the pipe
  • 39:05 – Differences in commodity yields and risks when investing in farms
  • 41:48 – Compounding knowledge over time and The Investment Pyramid (Faber)
  • 43:21 – Deploying a million dollars into a farmland portfolio; AcreTrader Learning Center, TIAA (Goodreds), Prudential (Shen)
  • 47:56 – What the future looks like for Carter as he looks out to the horizon
  • 49:11 – How investors are paid out for their returns
  • 49:57 – Carter’s most memorable moment over the last couple of years
  • 51:17 – Any plans for a Series B fundraising round?
  • 51:58 – Learn more about Carter and AcreTrader; acretrader.com/meb

 

Transcript of Episode 312:  

Sponsor Message: Today’s episode is sponsored by Bitwise. You’ll hear more about them later in the episode.

Welcome Message: Welcome to the “Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: What’s up y’all? Great show today. Guess what? I sold a farm, I bought another farm. Returning guest is here today to talk about it. We have joining us the founder and CEO of AcreTrader, a farmland real estate investment company offering individuals access to low minimum passive farm investments. Today’s show we’re talking all about farmland an asset class you know I love that historically has been one of the top performers but hasn’t been easily accessible for most investors. Our guest is trying to change that.

We start by hearing how COVID increased interest in farmland from both institutions and private equity firms. Then we walked through the process of purchasing farmland through AcreTrader, we use my recent purchase of an organic farm in Nebraska as a case study example. We hear about their due diligence process they go through for each potential investment. Their process for deciding which farm is an attractive opportunity and importantly, at what price. Please enjoy this episode with AcreTrader’s Carter Malloy. Carter, welcome back to the show.

Carter: Thanks for having me, Meb.

Meb: Where do we find you today?

Carter: Dale, Arkansas, it’s home for me and our business both.

Meb: I’m here in Los Angeles in an actual office. I just finished in the most Los Angeles way possible, a little snack of vegan avocado key lime pie. Does that sound like the most L.A. thing one could eat for an afternoon snack? It was actually quite delicious. Who would have known?

Carter: Your office is quite L.A. too by my last visit there. It’s a great spot.

Meb: So for the people watching on YouTube, we’re talking about farming today. So you can see in the background, this is a picture of my farm. And I have a big announcement to make about it today. And we’ll get to this later in the show about some farmland transactions I’ve been involved with. So listeners, make sure you listen to the end. Carter, last time we had you on was almost 2 years ago, which is crazy because it doesn’t feel that long, on episode 186. What’s been going on in the farmland world the last couple of years, anything interesting?

Carter: Everything’s interesting in our world. It’s been quite a bit of movement in commodity prices, in land prices, I think in larger markets acceptance of our business and this position, both on the farmer side and on the investor side. So as a company, we’ve seen tremendous growth, we’ve had a few capital raises since I last saw you as well. So a lot’s been happening, and all very good developments.

Meb: I think probably the biggest news item that I can think about was one of the world’s richest men disclosing he is now the largest farmland owner in the U.S., Mr. Bill Gates. Is he on your platform? Has he been buying up all this farmland through AcreTrader or what? Has he been sharp elbowing you in the neighborhood?

Carter: I don’t know that it’s that extreme. We do have a number of what we would call highly sophisticated and great investors on our platform that we work with both directly through the acretrader.com platform but also more, in general, in evaluating farmland investments and buying larger tracts as well should they be out to do that.

Meb: You mentioned ag prices and they’ve started to perk up in the past about a year or so. I mean, lumber being the most dramatic example but certainly corn, wheat, everything has been doing a little bit of a J-curve up. Walk us through since 2019, what’s the farmland world look like as far as impact of COVID? I forgot we had a pandemic in between the last time we chatted as well as the returns for the farmland space in general. What’s it look like?

Carter: I’ll start backwards on the impact of COVID. We’ve seen more activity, in general, investing in land. I think rural land and farmland often get lumped into the same analysis. And there has been a particularly large bump, everybody can understand why, of people buying rural lands or recreational property outside of a city where they can go hang out or bug out or whatever it may be. So there’s certainly been a reconnecting with the land since then. A bigger picture on the farmland side as well, we are seeing some strengthening of prices, in particular, in the Corn Belt, in the Midwest, in the I states seeing some record farmland prices there. There is a whole continued, sort of, slow and steady compounding of farmland prices is what we’re experiencing and that’s bringing people a good experience in this industry for decades.

Meb: You attribute to inflation concerns, you attribute it to supply-demand imbalances, what’s been the big driver?

Carter: Inflation is a big one, right? I think you hit the nail on the head there. There are certainly real considerations around inflation. So that’s one. There’s institutionalization occurring, our asset class that hasn’t really been here in the past. And private equity funds alone have grown from $3 billion to $35 billion over the last decade, roughly, it’s still a drop in the bucket, right? There’s a $3 trillion asset class almost in the U.S. alone. So it’s still a relatively small participant albeit beginning to really step in on the demand side of the picture.

The supply-side pictures is always the same, which is less, right. The amount of farmland we have, and the underlying economics are pretty straightforward on that front, the amount of farmland we have shrinks every minute. I think in the U.S., we lose several acres just about every minute. So it’s an incredible rate of farmland to lose, while at the same time, the demand for the products that come off of that land continues to grow.

Meb: The nice thing about farming, in general, is it tends to be socially distanced as well. I mean, you can, kind of, put your feet up in some of these air-condition GPS tractors and just watch old episodes of “Seinfeld” and “The Simpsons.” But what’s been, sort of, the investment impact during COVID? Has it been something that you think the farmland space, in general, has been dominated by the high prices, thus pushing the prices of the land and interest? People running away from the stock market. Any general takeaways or vibe from the past two years, any insight from your seat?

Carter: I think the investor demand from our seat has gone up dramatically, the investor interest and demand. And the first few weeks a little over a year ago, call it early March, we were all moving home for our offices. We saw engagement with our website going up dramatically, but investment activity relatively slow in that first few weeks of oh, my, goodness is the world ending? And once we got through that phase, then we have seen nothing but growth and demand on the platform. And though, again, the bigger picture of the investors are not necessarily driving up land prices, if you will, because professional investors in farmland are still a small minority of the overall industry ownership.

Meb: I thought you were just going to say you guys ran a huge digital ad campaign on farmers only and that just drove all the interest. The nice thing about farmland, along with a lot of other, sort of, illiquid asset classes is when the stock market was going bonkers last year, it feels like 10 years ago, the volatility of things like farmland…I used to joke, I’d post pictures on Twitter and say, “This is me evaluating the price change of my farmland,” is literally just me standing in a field with nothing else. You have the steadiness of something that doesn’t bounce around as much and has a balance with some income.

You guys did a great white paper. I don’t know if you’ve updated it about, kind of, the case for farmland investing. We’ll link to it in the show notes but any general thoughts on the last few years relative to, sort of, the booms and bust cycles of farmland? You know, we had the ’80s driven by a lot of debt, and then, sort of, the booming early 2000s, and then a little bit of a mellow period and, kind of, the mid-teens. These are broad generalizations … so you can correct me. And then it’s starting to really pick up again. Any general thoughts on the broad return space with farmland?

Carter: I think you’ve got it pretty right there through the positive return history of our land and NCREIF. We’re a member of that index actually, attempts to track farmland prices, been tracking since 1990. And you see some great years and some okay years, what we don’t see are really terrible years. There were some in a few states, in particular, in the early ’80s there was a big debt-fueled boom and insurance company field boom that created a lot of speculation. We don’t see that occurring in the market today.

As a whole, you’re exactly right. The 2015 to 2020 period was one of slower compounding, albeit still compounding and still seeing some catch-up today, although still, sort of, below that mean reversion over the long-term trend. You really hit the nail on the head for farmland, it’s not a wild asset. It’s not boom and bust time at all, it’s slow and steady compounding. We’re not out here looking for 5 and 10 baggers, right, to take on crazy returns, but we’re also far more risk aversion in investment style than, I think, most other asset classes.

Meb: I wonder why you haven’t seen the leveraging up in the farmland space, given where interest rates are. I wonder if it’s scars of prior generations and farmers remembering the pain they went through when they got upside down. Or is it something that it’s just transitioning to a different, sort of, new normal of lower leverage? Because in a world of, you know, 1% and in some parts of the world, zero negative interest rates, you would think that would cause more leverage to happen in the sector. But that’s not showing up in the data. Does that sound right?

Carter: There’s a lot of outright ownership of farmland out there. I think throughout the sector and the LTVs are like 20% or less, it’s a very unlevered asset class. Now, you get into some streaks of California where there’s real institutional presence and heavier cash flow crops like almonds and pistachios and you’ll see more leverage, but again, on a deal-by-deal basis, even there, we’re talking 50s and 60s LTVs maximum. So just far less systemic leverage throughout this asset class than others.

Meb: We’ve talked about a lot of this on the podcast before but farmland represents probably the biggest missing piece of the global market portfolio that’s investable, particularly from a public standpoint. We’ve had one of the REITs on, but there are really only a couple of public REITs and then private funds. And then, kind of, what you guys are doing. I mean, obviously, the direct ownership, but the direct ownership comes with all of its pain in the booty as well. Give us an update on AcreTrader, you guys had a major announcement, a big fundraising. But also, maybe before that, give us, kind of, the one-minute overview for the new listeners of what you guys do and how you approach investing in farmland.

Carter: We are an investment platform for farmland dedicated to three core principles or goals, and that is access, liquidity, and transparency. And then a firm commitment to all those things. Pretty straightforward for investors, they come on our website, and in a matter of minutes, add farmland to their portfolio. And you’re exactly right rather than going out to a county you may never been to and popping down a million dollars and managing a farm, which is a non-starter for just about everyone, through our website, it’s pretty straightforward. You go on, it’s a couple of minutes, you can invest as little as $15,000 or $20,000 in a particular farm, and our business is to take care of it from there. So it’s truly passive income for the investor. Both the farmer pays you rent, and the appreciation usually happens in the underlying land. We take care of the backend, administration, payments, working with the farmers, etc., etc. so that it’s truly easy for that investor to have that exposure.

Meb: Give us an overview, what type of farms you guys looking at, size, cost, geography, all that good stuff.

Carter: We tend to represent a mixed portfolio. And if you look across our deals, about 50 we’ve done so far, they’re usually, kind of, a million to $5 million each in terms of total dollar value. We tend to be a little more row crop than permanent crop, call it 70/30 or 60/40 row crops to permanent crops. And we can dig into the difference of those in a moment. If you look through the historical performance of farmland, that’s the most easily identifiable efficient frontier in terms of allocation across the two primary types of farmland, so the efficient frontier being a risk and return.

Meb: And does that mean that row crops are more…what’s the differentiation between the two?

Carter: Row crops you plant every year. Permanent crops are things like trees where you plant it, you may grow in for 20 or 50 or even 100 years on that same asset. So with a permanent crop, you tend to have direct commodity exposure and some of the volatility that comes along with that. You have higher cash flow…is a generalized statement, there’s all kinds of exceptions, but as a general statement, the cash flows are higher. The appreciation value…or appreciation has been lower than that factor because the trees are depreciating while the land is appreciating if you will. Position that next to row crops where a farmer is paying you rent, usually crop agnostic because they can change every year and often do. And the historical returns both of them unlevered and, kind of, low double-digit IRRs. And with row crops, the larger portion of the returns has been the appreciation with some underlying cash flow there as well from the farmer paying rent.

Meb: If you could look across the 50 farms is that you guys have done, how many different crops do you think that represents?

Carter: Thirteen states, probably 12 to 15 crop types.

Meb: And so you guys charge…how do you do it? You do carry? Do you do a management fee? How’s it work for the investor?

Carter: The primary way we make revenue is the seller pays to sell. The farmland seller pays a real estate brokerage fee that they are usually paying anyway and then it goes into one of our special purpose vehicles, there’s usually a management fee, 75 basis points, sometimes it’s 100. And then at the end of life, there is a brokerage fee as well, where we act as the broker to go sell the part. You’re going to pay that fee no matter what, there’s going to be a broker involved. The reason that we’ve set our business model that way is because, you live in the ETF world, Meb, so you know it well, low fees are the way to go. That is the way we’re all headed. And so we’d rather get in there and focus on volume and make money in fees that are already going to be paid in a transaction and keep the fees to the investor as low as possible.

Meb: To me, that’s a no-brainer where it’s no net addition of costs. You just, kind of, inserted yourself and removed one of the brokers out of the equation. Remind us how do you source these farms? Are you guys out just knocking on doors looking it up on…what is the farmland equivalent of Zillow? Is there such a thing?

Carter: There is no such thing. So we’ve got a team of five people today, and growing very quickly, dedicated to identifying and underwriting farmland that ultimately comes up to an investment committee that I sit on for anything to go to our website. So if you think about the funnel of farms that come in on a weekly basis, that may be 50, it may be 200, and maybe one of those passes our diligence to get on the website. And I want to speak about diligence more in detail in a moment because it’s arguably the most important thing that we do is the amount of no’s…the amount of farms you don’t see where we have done a crapload of work and decided to back away from it anyway because what we’re really about as a business is making sure that we can curate the marketplace as well as possible.

The easiest way for us to demonstrate that is you go on the platform right now, you are unlikely to see a farm listed today when we’re raising capital. We usually list a farm and they subscribe in minutes or hours, sometimes days. But we more often than not do not have inventory. And that’s our commitment. That’s the best way to get investors that we do put them in front of revenue. We would rather forego revenue and have high-quality offerings than just maximize revenue every day because we want to be doing this for a very long time.

Meb: And I feel like that’s a tough thing to balance. You have a marketplace that, on one hand, is constrained by the supply. You have the demand, and hilariously, it’s like a Nike sneaker drop, the way you guys do these things, or an NBA top shot. If you don’t invest quickly, these things get filled up. How do you guys balance that? Because it’s very seductive, sort of, I mean, this is also like, tell me your biggest weakness interview question is like, “I work too hard.” But like, try to be a little honest about it. I imagine has to be hard because if you have so much demand, that obviously means more revenue for your company, and more earnings and everything. But how do you balance that? And what are the big disqualifiers on the due diligence process? What’s, sort of, the checklist? And I’ve seen some of y’all’s reports and they are very thorough. So talk to us about the whole DDQ process.

Carter: Well, certainly, dig into diligence. First I’ll answer the hard question there. We are experiencing overwhelming demand. There’s no way around that. We’ve raised a bunch of venture capital here recently that we can talk about a little bit with the express consideration of investing more heavily in data science, geospatial analytics, farm underwriting, and our supply side of our business if you will. We are unwilling to waiver on diligence and unwilling to waiver on quality. Our board and we very strongly believe that is the right thing to do long-term. And so what if we miss some dollars today, we will build…we are in the process, we have built the biggest business in our industry, and we will continue to be the category king by doing the right thing by the investors and by all of the stakeholders involved on the supply side of our business as well.

The diligence process for us, it is multistage, it’s very formalized, we have a three-stage diligence process that each farm passes through. Underlying that first is data science and geospatial analytics. And what that means is maps and information. We boil it down, right, and we’ve got some really, really great people on that team. We’ve just brought over somebody from Applied Physics Laboratory at Johns Hopkins, we brought over a farm-specific geospatial analyst, just had a CFA data scientist joins us from Bridgewater formerly, his last employer. So we have some really great folks on that team doing the upfront, the quick flippers, if you will. We want to say no as fast as we can to any deal that’s not going to fit the mold.

Then it’ll step into the second phase of the diligence, which is really where more and more humans get involved in building financial models and doing local diligence, we call farmers, we call neighbors, etc. Diligence phase three is then getting even further and getting somebody from our team, one of our managers, somebody I can work very closely with out there on the farm doing the physical inspection, digging much deeper on environmental reporting, previous farming practices, etc. on that farm. Then it moves through a contract phase and ultimately onto the website should it pass through that death gauntlet of what is our team. And ultimately, the leadership of that team under a gentleman by the name of Ben Maddox, who’s one of the more intelligent people I’ve ever had the pleasure of being around. And he is staunchly defensive of quality, if you will, so he’s really the frontline defender there. The axe-man, the no-man, if you will, to turn those away.

Meb: What are the main not red flags but haymakers that you’re just like, nope, scratch, either the most common or most egregious are ones that you just like, see, that are like immediate disqualifiers?

Carter: Waters a huge one, we can start there, but water, soil and financial profile are the three things that we really do bucket, the three things we’re looking at very heavily on each farm. That’s it. And then each of them has 20 to 50 different sub-bullets that go underneath them. But as a broad statement, the water is important, the operator is important, the neighborhood that you’re in is very important, and the exit strategy that comes along with that. So we see a lot of what we call Excel farming happening in our industry, which is you can find looks great on paper but are terrible deals in actuality. We have to be very cautious of that, our industry has to be very cautious that you’re not doing those things. As an example, you can find great cap rates on cotton ground in the panhandle of Texas. And there are a few good farms in there. The cap rates are great because the water is going away.

In California, there are very attractive deals on paper. But upon closer inspection, if a farm in California does not have what we call dual-sourced water, so two different places to get your water from today and in 10 years and 20 years, then usually the advice is to run away. And if somebody comes to us with a farm, or if somebody comes to you with a farm for that matter, in California and they’re not talking about water outright on the first page of the conversation, then that’s always a big concern for us. So cannot express how many farms we have looked at in California and said no to because it had water issues.

Meb: What’s the big risk? It’s just drying up, too many people using it, too many folks in L.A.? What’s the main issue for most of these farms?

Carter: Drying up is the big one. Regulations are a big one because we’ve got…as the state, California has put in place what’s called SGMA and so a large body of water regulations. There are drought years, I know that you’ve experienced it, I experienced it when I lived there in 2014 and 2015. And in those years, some farms can be wasteful in their water use and so first part of regulations is to try to shore up a lot of that. And then it’s to begin having these irrigation districts more appropriately allocate water to the farms and/or charging them much higher prices to do so. There are two ways, primary ways to get water, ground surface water that’s, you know, a little canal going by your farm, and then well water, getting it out of an aquifer. Both of those have unique challenges to them. But what is important is that to the extent you ever possibly can, making sure that you have both of those, unbelievable plan if you don’t.

Meb: Is that not listed as, like, a main bullet point ingredient on the description of the property? Do you have to, like, dig through to the footnotes to find that, or do research, or is it something that the listings are not clear about? Because it seems like a pretty big issue to disclose or not disclosed what the situation is.

Carter: That is a very fair statement. Unfortunately, no, it is often not discussed at all. Rather, there’s just the assumption of, “Hey, this looks great in Excel. And so this is a good farm.” And when you take a closer look, without dual-sourcing, it’s hugely problematic. And even in dual-sourcing, it can be very problematic as well. Front page, right, you got to be talking about water in California, really anywhere you need to be speaking of water. Arkansas, it’s wells, and Mississippi, it’s wells and making sure you’ve got long-term, permanent access to the water. In the Midwest, it’s getting the water off your farm and then making sure you have appropriate drainage to get rid of the water because it can ruin a crop if things sit under pooling for a while. Soil and financial profile, and financial profile’s a catch-all bottom-up and top-down analysis. What are rents? What are appropriate rents? So a lot of farms get sold that can be a sale-leaseback where it’s over rented so it inflates the cap rate, that’s really dangerous. You got to watch out for that.

Meb: Meaning…when you say over-rented, meaning they just have crops on it all year long?

Carter: The seller of the farm is willing to overpay or…that’s usually because they’re doing a sale-leaseback transaction. Or somebody, the farmer on there, has neighboring acres and is willing to pay well above market because it’s a contiguous farm. That’s great and you want to be able to earn that income if you can while making sure it’s a good deal for the farmer. But if somebody else is not willing to pay that rent, you need to really underwrite to market, not underwriting to the inflated value. Likewise is the top-down approach on comparable sales and understanding what’s really in the area, what’s fresh on comps. And that’s a big, big internal effort of ours is our large and proprietary comp sales database. That’s the bottom-up and top-down, again, there’s a myriad of other factors there as well.

Meb: How often are you guys…does it meet all the criteria and then you’re actually…like, you’re just too cheap? You know, you have your price you’re going to pay and somebody outbids you. Is that rare? Is it often?

Carter: Very often. All of the above are real showstoppers in underwriting but certainly, price discipline is very, very important as well.

Meb: All right, Bill, if you’re listening, Mr. Gates, you got to quit driving the prices up everywhere. So all right, and the third one, you mentioned soil.

Carter: Soil. That’s correct. So it can vary. In some states, they even have soil scores. So in Iowa, they have the corn suitability rating, Illinois, they have the productivity index. So in some states, you’ve got these great indices. In other, it’s really about having local and hyper local knowledge on a particular type of sandy loam or silty loam, or clay soil. And really why you want to understand those things is can this farm drain well? Again, can it get water off when there is a large water or watershed event? And can it grow a multitude of crops? And if not, that’s okay, too, you just really got to understand, hey, this is a rice farm and it’s only going to grow rice. So we’re pretty much committed to rice and what would probably be …

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Do you guys ever see a time when you guys are running the show on the farm too? Or is that just too much headache and trust the farmers to know their land and area more?

Carter: You hit the nail on the head there at the end. The local farmers get to know how to farm more properly than we do. We got a lot of farmers on staff here and a lot of folks with very material asset management experience in farmland. So we speak to farmers about, “Hey, here are some tech trends and things that really do work or some treatments that we’re seeing really work or some carbon programs that are of interest.” But what we want to be careful of not demanding how they run their business so these farmers have their own business that they own and operate.

Meb: Before we leave the due diligence section, anything else to come to mind you think that’s particularly important or you want to touch on?

Carter: I ran through a lot of what sounds like very complicated factors. At the end of the day, diligence on the person or the platform is very important in understanding what we’re up to what’s out there in the market. And diligence in the individual deal, we would urge anyone to look through…you can see, again, with full transparency, the deals that we’ve done, you can certainly look at those yourself. If you are not a farmland expert, hiring somebody external that can go dig through that is a farmland expert and that trust but verify thing, right? Go dig in, really understand what you’re getting into before you invest. What we’re most proud of is that we have a ton of active farmers, active farmland investment experts investing on our platform. So those people really come, hit us hard with hard questions, and we love hard questions. I think that’s where the truth really comes out.

Meb: So far, we’ve identified two new business models for you guys or someone else to expand into. One, the farmland brokerage, and second, the farmland consultant, valuation specialists to hire and go over all the AcreTrader deals. I like it. So you guys just raised a huge slug of cash. Walk me through the process. Were you down on Sandhill Road doing all the presentations? Was it family office money? Was it just Bill Gates investing? How’d you guys decided to raise all this money? And what are you doing with it? You guys just going to buy a bunch of fancy tractors or what? What’s the plan?

Carter: No, just the reverse there. We raised our own capital in 2020, a little over a year ago. And that was a family office primarily, one of the larger family offices around, an offshoot of that. This year, just about a month ago, we closed on our Series A round, we raised an additional $12 million for the business. That process was actually pretty quick. We launched the formal process, and I think actually one of the benefits of the pandemic is I did it all sitting in the chair on the side office’s meeting room. I mean, here, it was a two-week blitz of being on Zoom all day, every day with some great venture capital investors from around the world. We were lucky to, after a couple of weeks, receive a few competing term sheets. Ultimately, we chose to go with what we use, a highly strategic lean investor, Jump Capital, maybe four or five unicorn-like billion-dollar-plus type investment platforms that they are investors in.

They really understand a lot of things that we don’t as a growing business of about 30 employees today. We also had Revolution’s Rise of the Rest Seed Fund invest, that’s a Steve Case there. And Narya Capital was an investor as well, that’s pretty public on…you search their name, looks like, if you look online, Peter Thiel, Andreessen, and Eric Schmidt and several other names are investors in that fund. So we really got some awesome support. I think for us as a company, we always want to look out and make sure that we avoid pitfalls in … to the extent we can. We’re just incredibly lucky to have the investors that we do and the guys we do. We actually just got finished with our board meeting yesterday. So it’s a really awesome time right now up here, in general.

Meb: And most of the money, is it headcount? Is it expanding the platform? Is it marketing? What are you guys going to do with all of it?

Carter: Primarily, headcount is really the commitment there, call it half and half, software engineering and operations. We are really doubling down, we got 9 or 10 software engineers with us today and really leaning in heavier, in particular, on data science and geospatial efforts that I mentioned earlier. We talked a lot about underwriting and the supply side, that’s a big commitment of ours, both just out marketing to farmers, and what we call network nodes throughout the farming community, to let them know, “Hey, we are here. We are a capital partner, we are here to help you grow.” That’s primarily where most of our farms come from. A farmer brings it to us and says, “Hey, I know this may come up for sale sometime soon and I’d love to farm it. If you guys can be an investor with me, that’s something we’re really excited to be pushing further on.”

Meb: Any other…while we’re here, is this an expansion plan? Is it mostly, sort of, blocking and tackling of, kind of, what you guys are doing now? I imagine it’s a blue ocean opportunity, it’s just not really a lot of people doing what you’re doing. Or is it like, “Hey, we raised 10 million bucks and we’re going to expand into Argentina and Belarus or something?” Any other general plans or is it mainly just grow what you got?

Carter: Grow what you got. Do one thing and do it well. We do broker farms. So we’re investing more there, right? The one-to-one transactions on our website today is primarily focused on one too many. And we do have people that say, “Hey, I want to buy a $5 million farm or bigger,” whatever that may be. And so we want to be able to help buy more there. The primary push is just getting more people and continue to get better at what we do. I mentioned again, having strategic partners is really key to raising capital. So we expanded our board of directors as well and added the former CEO of the largest farmland investment firm out there. And also he was the head of their $4.5 billion U.S. ag portfolio, so the largest farmland portfolio here in the U.S. And so, again, it’s really about just getting as much guidance as we can, as much outside counsel as we can, and hiring as much great talent as we can.

Meb: We had so much fun on the last podcast we did. Listeners, you’ve heard me talk a lot about our experience with farmland in my family, which was mostly in Nebraska and Western Kansas. And all my trials and tribulations, and agony, and ecstasy over the years of being a farmer. And two of the biggest problems I had was one is that, for me, it was very much always a connection to my heritage and my family, you know, on one side, and so the ability to go out there and spend time with relatives. And also spend time on the farm, ride around on AVs, shoot some guns, and just be outside in this beautiful farmland that we had in Western Kansas, which as a child did not check that box. I was like, “This is so boring. This is the ugliest…” you know, because it’s so flat. But today, like, it’s the most peaceful, living in Los Angeles, beautiful countryside.

But the challenge has been this generational trend of there’s not a lot of young people farmers as much anymore, it’s the older generation. And a lot of young people are, you know, moving to cities. The heritage aspect for me, part of it is becoming less and less of a part of the total. And then there’s on the other side is the investment side. And I think it’s one of the world’s best non-correlated investments to a traditional portfolio. The problem I have is that I’m extremely concentrated, meaning I have one geography and one crop essentially, or maybe two. Currently, that’s wheat, we’ll be out there for harvest in June, which will be a lot of fun to ride around on few tractors.

Anyway, so I ended up selling a portion of the farm for the reasons just mentioned to diversify. But also, I wanted to transition our farm to organic and that’s just a beast of a process. Anyway, this brings me to a long-winded description of I’m now an AcreTrader farmland owner, proud to say. I had to get in there as soon as the drop happened. My god, I almost missed it. So Carter, why don’t you tell me a little bit about the farm that I own, anything that you can give me some good insight into in Nebraska?

Carter: First of all, we’re very excited to have you as an investor on the platform, Meb. That farm, in particular, was just pretty recently, it is in what we call a good part of Nebraska. We talked a lot about water earlier, much of Nebraska sits on top of the Ogallala Aquifer. In many places that being is bad news bears. In addition, you’ve got the 98th meridian, which is an area where the rain line is moving. So you’re getting less and less precipitation in large parts of Nebraska. So this was actually our first foray into Nebraska. I mentioned 13 states earlier, this was the 13th.

The reason for that was this was a mile from a river. It sits on top of one of the very few parts of the Ogallala Aquifer that is replenishing. So it’s filling up at a good rate. So the water table underneath that farm, believe it or not, is about 8 feet deep, just to have you dig down there and find the water with a shovel. So really, really exciting on that front. Great, reputable organic farmer. He’s got about 5000 acres. This is an organic farm as well. And he’s about a mile from the river there. It’s on the interstate, new equipment on the farm. So we’re really excited about it.

Meb: It checked a few boxes for me. One, I love that it’s in Nebraska, so it’s about an hour away from where my old man was born in Holstein, Nebraska, which is outside of Hastings. There’s like 10 people in the town. I can go drive by and take a gander at it one day, but the organic part I thought was important. You know, it’s funny, I remember growing up as a kid, my old man talking about that aquifer, he said it’s going to dry up someday. Hasn’t happened yet, I don’t think totally but it sounds like it’s on its way.

Carter: That is the unfortunate truth. Me too, by the way, my old man has a master’s degree in groundwater and is a water freak. And that’s apparently built into me probably. He’s been talking about the Ogallala Aquifer since I was a kid. So there are some bad problem areas there. And again, there’s some good ones too. But as a whole, the aquifer is pretty problematic for a number of farmers, unfortunately.

Meb: I mean, I wonder how much…to get off on a tangent, how much technology could play a role in solving some of these issues, whether it’s through desalinization? Or just reducing the global stressors of water as a major issue in the coming decades, which could theoretically alleviate some of the issues these farms have? Is that something that you guys keep an eye on? Is it maybe a decade or two away? Is it something that you think about at all?

Carter: We think about it too much, reduce, reuse, recycle, right? All those things can be influenced by technology, and they are, so we are certainly seeing far more responsible water usage throughout most farming areas in the U.S. You’re exactly right that in some places, it’s not a material consideration today. But we really want to think about the farms we look at. Think about the exit, right, in 10 years when this is being sold, in 5 years and a much later timeframe, when that buyer looks out the next decade, will they be comfortable with the water situation? Because if not, you’re going to have a material value impairment or potentially have that. Water is not a hair-on-fire situation in most places today, California is one exception. This is a now problem. It is a right now issue. And we will see hundreds of thousands of acres lost up to, I think, a million acres lost in California over the coming years because of water usage.

Meb: Let’s go back to my farm, let’s go back to me. I’m looking at the farm. And obviously, we’re on a podcast, and these are expectations, and you can talk about it and disclose it out the wazoo all you want. I see that this is going to be growing some corn, some barley, you guys bought the farm for a little over 3 million bucks, cash yield gross about 3.7, and a projected net return of around 8%. That sounds pretty juicy to me in a world of 1.5% interest rates, and I should expect to hold this for how long, 5, 10 years?

Carter: That is the idea, 5 to 10 years.

Meb: So someone who’s interested in these, what’s the minimum, what’s the maximum that people can invest?

Carter: Minimum is usually around $15,000 to $25,000 on a per offering basis. Maximum is however big the deal is, right. So we have people that will…we have institution, family office type players on the platform today. And some of those come in and they allocate $100,000 per deal, right, and they may come in and just pick off a half-million here and a quarter million there. There are all kinds of ways to participate. And that’s one of the beauties of the platform is that you can choose, you can…whether there’s an emotional appeal of being in Nebraska or a pure financial…that’s what we’re after, the financial appeal of farmland and the underwriting and realizing, “Hey, this looks like a really well put together offering.”

Meb: We’re just going to do a little brainstorming here. I love giving unsolicited ideas and advice. So feel free to take these and dump them in the trash can. But I’ve talked to a lot of people, listeners of this show, that have invested on your platform, including some people that own, I mean, over a dozen farms. And so I think one friend said he owned over 20. So for the people that end up saying, “Look, I just want to max diversify, I want to invest in every deal you guys have.” Have you ever considered doing, like, not a rolling fund, as Angeles would call it, but maybe just a fund, in general, where it’s like, almost like an automatic allocation to have people be able to put it on autopilot? Is that something that’s in the cards perhaps?

Carter: Potentially is and shout out to our friend Kenny, who I think you referenced a moment ago. It potentially is on the cards for us is something we’ve evaluated pretty intensely. We’ve got a couple of attorneys on staff, and we’ve recently gone through the exercise yet again. Our focus is on how do we keep fees low for the investor, and making sure that we’re able to wrap that around any type of fund or restructure. And importantly, also, transparency, we mentioned a moment ago, the beauty of the platform being able to participate when you want, and in what you’d like to, and the fund removes some of that optionality.

Meb: Well, I mean, it doesn’t even have to be fun, per se, as you say, “Look, if you commit 20 grand a quarter, or 20 grand a month, whatever your frequency and minimum is,” it would give AcreTrader a…I mean, you guys seem supply-constrained anyway. But it would give you a, kind of, set expectation on people that are just wanting to allocate and just, like, trust you guys and say, “Look, I want to just bang, bang, bang, invest in a bunch of these deals.” That would give a little more certainty on the potential investors and allow them to remove the stress of the drops of getting in there for the top shot.

Anyway, just an idea because in my mind, I would do something similar if it was…because I like the diversification but also more interested in, say, the organic farms, right? So for me, there is a filter, but I would just be interested in that as a, kind of, rolling, sort of, investment. Anyway, things for you guys to marinate on. Can you guys give us any previews? How often are you guys dropping farms, once a week, once a month?

Carter: We do a farm a week right now is the rough average.

Meb: Can you give us any broad previews of what might be coming down the pipe?

Carter: We’ve got about a month of our pipeline built out today. That’s pretty typical for us to be able to look out a month. And so I think by the time this goes to air, we may miscue those anyway. But suffice to say, the important thing there is that that same incredibly stringent diligence process is being applied methodically every time we bring an offer into our…

Meb: I’m just looking at all the various…I’m on your site right now and I’m going through and I’m looking at apples, and cherries, and peas, and corn, and pecans, interesting. What do you think is, sort of, the max? And I assume they’re riskier in some capacity for the ones that end up looking at like a 10%-plus yield. Is it necessarily that they’re riskier or is it just a function of the actual deal? Why shouldn’t I just buy all the ones that say there’s a 10%-plus return as opposed to the ones that may be a little bit lower?

Carter: It comes down to risk versus reward. As you’ve highlighted, the overall risk profile of farmland investing relative to most major asset classes is attractive, right? We look at the Sharpe ratios of the asset class, if you will, the risk versus reward, it is really exciting. So you’re exactly right I think as with just about anything else, you do tend to move up the risk curve a little bit for higher yields. And most of that’s a deal-by-deal basis and it’s pretty known as very explicitly described in that deal and where your exposures are. That’s the general idea there.

Meb: What are the traditional risks that I face? And I’m saying I as pertaining to all these farms. Is it bugs? Is it the weather? Is it act of God? What is it?

Carter: For row crops, it looks quite a bit different. I think that, you know, the risks are really, sort of, primary ones are operator risk and operator not taking proper care of your soil, or your ditches, or your drainage, or the wells, or equipment maybe on that farm. With permanent crops, you then do step a little more directly into commodity risk. But if you buy almond trees, then you really do want to be bullish on almonds for some long period of time. We internally have deep macro research on every commodity type, not every but certainly all the ones we are exposed to today and many that we evaluate. And so we do avoid some of the riskier commodities that are out there. There are some nuts, there are some citruses…citrus, is it plural? There are some citric…I don’t know. And there are some fruits as well that are a little more dangerous.

Meb: Which are the uninvestable ones? Is it oranges? What are the stuff you guys shy away from?

Carter: The juice got to be worth the squeeze, right? So, there’s little that’s uninvestable, it just comes down to price at the end of the day, because there is at least some underlying demand even for…oranges is a great idea, right, Florida oranges, most of which are juice oranges. That seems pretty…like, when was the last time you had a glass of OJ? There’s a real secular headwind against that industry. So it’s something that we haven’t participated in. There are specialty nuts out there. There are specialty fruits and other vegetables that can be a little concerning as well. And so we don’t want to go out and dog people’s particular operations because they may have real reasons why they’re invested there. But we as a platform have strayed from a lot of fruit for quite a bit, best way to put that.

Meb: It’s funny to say that about the orange juice. We wrote an investment piece called “The Investing Pyramid” and it looked back at what was the commonly accepted belief of our parent’s generation of food? It was like you need to eat 10 servings a day of pasta and cereal and sugars and everything else. I mean, my God, the things I ate for breakfast. Right now, even the concept of giving my son Fruit Loops every morning for breakfast gives me, like, sweaty palms. I can’t believe it.

And one of my favorite private investing startups that I continually see and I still think is probably tailwinds is reimagining a lot of foods from our youth but with healthy ingredients, and the Magic Spoon is the obvious one with cereal. Listeners, if you haven’t tried it, it’s actually pretty good where they’re trying to go higher protein, lower carbs and sugar, added sugar, and all that stuff. But you get us a healthy Twinkie and healthy powdered doughnuts, we’ll see what that world looks like. The paper we wrote, the analogy was, what did our parents’ generation believe about investing versus what we now know and believe? And it’s changed quite a bit over the past 50 years, some things haven’t changed. My goodness, what’s going on in 2021, farmland hopefully will be a safe haven when all the madness ends.

Carter: That’s my argument to my parents’ generation is why are you buying bonds and gold when you can invest in farmland, right?

Meb: Yeah, well, look, you know, everyone on the planet smoked cigarettes back then, too. I don’t fault them because maybe they didn’t know. But that’s the beauty of knowledge that compounds over time. All right, let’s say I’ve got a million bucks that I want to invest in farmland. I’m sure you’ve gotten a million of these emails or calls already. And say, “Okay, Carter and team, I’m going to invest a million bucks over the course of the next year, two years. I want to diversify, optimize my farm Sharpe ratio and buy a handful of farms in different geographies.” What’s your recommendation? How many farms do I need? How many different crops? How many different geographies? What’s the best way to deploy that money?

Carter: So first big bright flashing disclaimer, we do not give investment advice. The thing that we point people to is there are some great white papers out there. TIAA Nuveen has some really interesting data. Hancock has some interesting data. There are a few others.

Meb: We’ll add all the white papers you want to send over to the show notes, mebfaber.com/podcast.

Carter: Sweet. Prudential as well. There’s, a lot of them out there you know, as well as our website, we have reams of information on our website you can read about and we can explain to you.

Meb: Hypothetically speaking, how might one consider a strategy of putting a diversified portfolio together?

Carter: I think the two primary considerations are crop type, and that can be as simple as row versus permanent crops, and geographic diversification as well. That’s really the primary two things we see people seeking. As I mentioned earlier, the investment historical returns, right, this is not a prediction of the future, but the efficient frontier there had been around, call it, 70/30 of row crops versus primary crop. Some folks want to do more 50/50. We’ve seen some people do all one or all the other, some people just want the juicier stuff and they like pecans and the secular trend behind that long-term. Or some people just want ultra-boring corn and soybeans because that has produced wealth over generations and something they’re interested in. That’s how I got into investing in farmland a long, long time ago. And still, a very core part of just about any farming portfolio is having those base commodities.

Meb: How many different, within those, sort of, row verse perm would you say is a reasonable amount to have? Is it like four different crops? Do I need 10? Is it a declining utility after maybe three or four?

Carter: The problem becomes a declining utility after a certain point, especially with row crops because if you’re buying the right kind of ground, you switch them out when a farmer switches them out anyway, right. So the quality of the asset is more important than the commodity itself. And so that gets you back to geographic diversification as opposed to crop type diversification.

Meb: Have you guys had the good problem yet of, let’s say, some of your family office investors or just someone listening to this, MIT endowment, maybe it’s a high net worth individual says, “Carter, actually, I don’t have a million bucks, I have $10 million or $100 million. And you sound like a genuine human being. Can I just have you guys manage it and do it for me? The problem is I would soak up all of your supply for the next year.” You know, have you guys had those conversations? Or is it not a focus? Have you considered doing it as a sidecar? Or as a sub-advisor? How do you respond to those?

Carter: For folks that want to buy a farm, right, I think…because we also see that with timeline, right? Some people say, “Look, I don’t want to own it for 10 years, I want to own it for generations.” And you’re exactly right, maybe I want to buy a $10 million farm, we can and will continue to help facilitate those types of transactions. So yes, for those types of investors, we absolutely work with them.

Meb: But they don’t just want to buy it, they want you guys to manage it too. They don’t want to deal with it. They just want to give Carter and AcreTrader the money say, “Here.”

Carter: That’s right. We are thrilled to have those conversations. We see a lot of those folks ultimately end up investing directly on the platform. And then you have a lot of quant investing type of listeners. We have a shocking amount of quant investors on our platform. They come in and systemically invest in deals and they’re, sort of, my favorite folks to talk to you because they know numbers and they dig in hard and ask really, really great questions.

Meb: It’s such an obvious missing piece. And it’s just been such a pain in the booty. You know, I was thinking about it as we’re talking about the risks and smiling as you were talking about the farmer risk of what happens. We’ve told it many times before, but we had a…thankfully insured, but we had a combine burn down and burn down an entire…It was like the best wheat crop we’ve ever had in, like, my lifetime and it burned down the entire thing, not to say that it was user error, but it’s one of those things you wouldn’t expect. And then just scratch your head and say, “Well, yeah, I can see why this isn’t just a set it and forget it, sort of, dividend reinvestment that you can stick in your Vanguard account.” What’s the future look like for you guys? Any other thoughts that we didn’t cover today, as you look out to the horizon, anything else that we didn’t cover you think is particularly interesting, got you worried, gotcha excited, all that stuff?

Carter: The one big one is our commitment to access, liquidity, and transparency. And we want to just continue to double down on those things, in particular, we bring the best opportunities and the win-win scenarios to market. The other one is what questions people should ask us. And when you’re investing, asking about the water, asking about the operator, the neighborhood, the exit strategy, our business and what our plans are, and how and why we’re going to be here doing this in 10 years and longer. We love hard questions. And so we really encourage people to come spend time with us. Call us, we’ve got a full investor relations team here. We firmly, firmly believe that the best investor is an educated one. And we want people to know not only who we are and what we’re up to, but we want them to be able to understand exactly the offerings we’re bringing to market and what the thesis is, right. So I think that’s a big part of it.

And then, you know, again, we talked about farm sourcing earlier, but how we find farms, it really comes down to spending millions of dollars having the best data, the best tools, and most importantly, the best people out looking for land. And that’s really what our company is rooted in, what we’re firmly doing every day, all day all here.

Meb: So if my Nebraska farm just crushes it and we get a big fat rent check at the end of the year, what do you guys do, you just send me a check in the mail? Do I get a K-1, how’s it all work?

Carter: Most of our investors will link their bank account to the investment process. And it’s very simple, we just drop money in your wallet, and you can drag it out to your bank. We can ACH wire, we can even mail checks. We don’t love doing it but we will. So it’s pretty straightforward on that front. From an accounting and tax standpoint, we do send out K-1s, again, that’s electronically deposited in your wallet in your account. This year, we got all of those out in February with maybe the exception of one farm if not two. That happened at the very beginning of March. So if the great thing about farming is it’s really straightforward P&L, very easy “business,” and so we get those out in a very timely manner.

Meb: And we normally ask what’s been your most memorable investment, but of the past two, years what’s been the most memorable moment for you guys? It could be part of the fundraising experience. It could be drinking too much bourbon on a farm in Kentucky and sleeping in the woods. I don’t know, anything come to mind as particularly memorable over this rocket ship ride you guys have been on for the past couple of years?

Carter: I’ll avoid the bourbon-related stories for obvious reasons. There are so many great memories and I, like, hate to cop-out on an answer for you. We have what we call dopamine rushes, right, the big days where everybody cheers and it’s just pumped up. For me, I think the overarching theme has been the people here that I get to work with every day and seeing them excited, seeing them pumped about being here at work and having a material impact on the business. So it’s lots of little hits along the way of seeing people win, I think that’s the most exciting thing about our business.

Meb: We’ll have you back on to talk the bourbon story. You guys going to have, like, an AcreTrader Lollapalooza, sort of, Coachella event where we can all come to hang out on the farm and do a little post-corona socializing and all get to see some of our land in action? Come on, you guys going to do a little AcreTrader tour or what?

Carter: We absolutely are. Stay tuned on that front. One of the farmers we partner with has a … distillery or an apple brandy distillery with the apples that come off of his farm so we might have to make that part of the story.

Meb: I’ll sponsor the beer tent. What, sort of, runway do you have, you guys going to ever raised another fundraising round for the really wealthy VCs and endowments listening to this? You guys got plans for a Series B, or does this, kind of, set you off into cash flow heaven for the foreseeable future?

Carter: This can set us off and I think it comes down to we’ve got a very, very long runway in front of us. And it comes down to us as operators, can we effectively deploy capital? We are not in spend mode. Even after just raising a large round, we still have most of our previous round left in our bank account. We are not aggressive spenders buying ping-pong tables and all that kind of fun stuff. So pretty conservative in our underwriting of our people, of our farms, and of our own business. So we want to make sure that we’re here for the long term and that’s the primary focus.

Meb: Carter, it has been a blast as always. For the listeners, I’m sure they know where to go, but if they want to find out what’s going on with you guys, check out the next drop, what’s the right place?

Carter: Acretrader.com.

Meb: Thanks so much for joining me again, my man, and look forward to seeing you in the real world.

Carter: Thank you, Meb. Same to you.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at themebfabershow.com, we love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.

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