A week ago, I received a letter from AcreTrader about one of the farms we invested in.
(it's the Middle River Almond Ranch in San Joaquin County, CA)
Costs were going up, revenues were down, and they were going to run out of money.
- Cost Inflation: Farm input costs (fertilizers, fuel, labor) have skyrocketed, exceeding initial modeled cost projections by 50-100%. California's regulations further amplify these cost pressures.
- Interest Rate Hike: Borrowing costs have tripled, significantly impacting cash flow, and raising concerns about the Company’s long-term profitability.
- Almond Price Decline: Recent almond sales fell 40% below our modeled target sale prices, impacting our projected income, valuation of the project, and the near-term profitability of almond orchards.
It was time to decide if shareholders wanted to sell the property or put in more cash, to fund the business until things improved.
In the email, they were asking on a vote to decide what to do next.
☝️ Just a point of clarification, technically, the farm hasn't failed. It's just losing money and at a decision point where shareholders have to decide what to do next. If things were going well and someone offered to buy the farm, we'd probably be going through a similar process. In a sense, this is a look into what happens at a decision point for a farm on AcreTrader.
In any real estate endeavor, whether it's farmland or an apartment building, increasing costs is always a risk. If you have revenue that exceeds those costs, then slimmer margins is fine for a little while.
When revenue drops and costs go up, you have a nasty convergence where it's harder to meet those rent payments.
In this case, there were two options – sell the property or initiate a capital call where investors chip in more money. If you sell the property, they estimate you recover 60-90% of the value. Not great but not tragic.
With a capital call, the idea is that you give it enough cash to survive the challenges. Either rates and costs go down or almond prices go up.
Did the updates suggest a failure?
I didn't read the bi-annual updates very closely. The updates were also quite brief, only a page or two, with limited financial data. That said, even if they were detailed, I probably wasn't going to read them closely.
The investment is illiquid, relatively small, and I had zero say (or expertise) in operations. There wasn't much I could do! I read them for entertainment and not with a keen financial eye.
This is the risk with investments where you're a limited partner. You have no say.
When I received notice that things were going south, I didn't know. So, I decided to go back and read the updates. They said that input costs were going up but everyone knew that. Inflation has been significant the last few years.
They mentioned loan costs were also going up, which, we all know because interest rates have gone up.
The updates did give you an idea of the risks but perhaps not the severity.
But again… there's nothing I can do. I'm not a farmer and I'm a limited partner.
I don't fault AcreTrader or the operator on reporting, I'm not sure there was much else to say about it.
What can we do next? Sell sell sell!
I voted to sell and recover as much as we can because I don't see prices going down anytime soon and interest rates aren't going to fall all that quickly either. I think these challenges will persist for at least another year.
I don't have a huge share in the farm so I'm not sure what my vote means.
The capital call they're hoping for is $2.1 million after an initial capital raise of $2.8 million. The property was sold for close to $7 million so I don't know if the $2.1 million capital call was across all shareholders or just ones through AcreTrader.
Either way, it's supposed to help them last until 2026… but I'm not looking to double my investment into farmland (or +40% if it's across all $7 million).
I invested in three farms on AcreTrader and, unfortunately, this is the only property that hasn't made any distributions. Whatever loss we take on it is what it is, but I don't think putting more in given the current situation makes a whole lot of sense.
I voted to sell and…
AcreTrader sold the farm in a week!
In one of the fastest actions I've ever seen, AcreTrader sold the farm in a week.
I voted on March 13th; I received an email about the sale today, March 20th.
While I suspect this was in the works for a while, only needing the positive vote to consummate it, the fact that it sold this quickly told me two things:
- Things were dire. Other investors felt the same as I did.
- AcreTrader and their partners don't sit around waiting for things to happen. They weren't waiting for the vote to then start shopping it around. This is how I'd want things to go.
In the end, they sold it to a local farmer and the sale is scheduled to close in about a month. The farm sold for more than the investment but after debt, interest, and sale costs, investors will walk away with 43% of what they started with. A $2.8 million investment turned into a $1.202 million.
There were a lot of negative factors, including a nearby almond grower going bankrupt and getting sold at the same time… just bad luck. In the initial email, they had hoped to recover 60-90%. So it goes sometimes!
At least this can offset stock market gains! 😆
(who am I kidding… it's not going to do that, I never sell my stocks!)
This will be the first property that will have any sale activity on it in our AcreTrader portfolio. While I would've loved for it to have been a positive result, this is far better than a total loss.
I still like the Acretrader platform and the asset class (the two other farms are in Louisiana and Illinois, neither of which deal with almonds), but this is a good reminder that not every investment works out.
If you are curious what it's like to use AcreTrader, our AcreTrader review goes into more detail on the platform.
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