A Conversation with George Bravante
George Bravante is a scarce commodity on the investment landscape: a professional who started out as a foot soldier in commercial real estate investment and finance, rose to the top in that industry, but then was seduced by the stability and consistency of farmland profits – which he calls “ranching” – some 30 years ago.
From his first 10 acres acquired in 1992, Bravante presently owns 2,927 acres, and, apart from various fruit crops, has produced black ink every year. Appropriately, Bravante today is as eager to talk about “88s” (a size of orange) as he is arcane wrinkles in the tax code that benefit those who invest in farmland.
Due to land, water and generational issues, rare opportunities are shaping up in California agriculture, and Bravante is opening up his investment acumen and industry know-how to outside investors.
For patient money, very solid returns will likely be paid on the farm table.
We sat down with George for some frank talk on making money by buying, redeveloping, operating, and selling farms or ranches. Here are some of his insights.
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Well-managed Northern California farmland has done well for investors for decades. But why buy now?
Well, water is one big answer and the Sustainable Groundwater Management Act (SGMA) is another. Some agriculture districts in California will under SGMA or by reality, move to sustainable or less water use in the next couple of decades. In a nutshell, that will mean not over-consuming artesian resources. Some districts are already running out of groundwater, and their wells are going down 2,000 feet and still hitting dry.
Overusing scarce water resources in some locations has caused subsidence issues with the land above collapsing as the water beneath becomes increasing depleted. Archaic regulations permitting unfettered tapping of water resources are coming to an end and only locations with long term, sustainable access to water resources, such as those we target here at Bravante Farm Capital, will remain. The opportunity we are targeting is that as some farmland becomes unworkable and ultimately will become barren, other areas will remain highly productive and as supply diminishes, will become increasingly in demand driving up values.
In investor terms, what does that mean?
Well, obviously, you do not want to buy farmland which does not have abundant water, naturally and entitled. As access to water sources become increasingly restricted under SGMA, the supply of good arable land will shrink even as demand for food continues to increase. The good news is, we know where that land is and, as the crunch is out 10 years or so yet, we are well ahead of the curve.
That said, to buy land that has long term, sustainable access to water in areas identified by SGMA as those with the best water supplies, requires paying a small premium. Local investors don’t want to pay this premium for great water areas. This gives us a competitive advantage in acquiring assets that will appreciate more rapidly as SGMA implementation starts to restrict arable land supplies and institutions continue to look for land to buy – both of which will create price inflation that far outstrips other real estate asset classes.
Surely, other investors are looking also at farms…
Yes, but the buyers who drive up prices in farmland, as they do in all other real estate asset classes, are institutions and private equity shops and these investors are not interested in undeveloped, or redeveloping, farmland. They want to buy developed farmland, hold for a while, and sell. Institutional and private equity company capital is often driven by the remuneration packages their managers are provided to incentivize performance, but these are incompatible with long term, patient money or with building multi-generational wealth.
Frequently, private equity capital structures require money be deployed (even if not entirely prudent to do so) in order to generate initial fees to support the management structure, and force exits to optimize returns to the management team. Developing or redeveloping farmland, which takes hands-on and management skills and, in some cases, a few years of no returns upfront as crops mature, just does not work for most institutional investors and their managers.
OK, but what about other private-equity investors driving up the prices?
Certainly, farm values are higher, and will keep rising. But we are at a critical juncture in the 2020s, with many farmers reaching retirement age. Their children, despite being fifth or sixth generation owners of the land, have little interest in farming and in some cases prefer to sell. In a lot of these cases we are talking about smaller farms, under 100 acres, that institutional and private equity buyers find too small.
We see the same exact patterns in other real estate asset classes like apartment buildings. Complexes with between, say, 30-100 units are too small for institutional buyers and too large for mom-and-pop buyers, so fall into a sweet spot of undervalued assets due to relative lack of demand. Similarly, if conditions are right, or if a farm property is contiguous with a property we own, then a purchase can be very profitable.
Do you benefit from economies of scale?
Yes indeed, by acquiring smaller farms that are within our target areas for good water sources and nearby other assets we own, they will benefit from economies of scale. We can deploy our existing farming manpower and management – irrigation, pruning, harvesting, packaging, sales, and transportation – to efficiently manage those properties. It really is no different from consolidation in any industry, real estate or otherwise. We can buy supplies in bulk at discounted rates, utilize the same management overhead at little or no additional cost to operations, and utilize our labor pool efficiently to maximize profits at the ranch.
The redeveloped farms, or ranches, will be easy to sell?
Well, yes and no. In principle, yes, because we are targeting assets that are underutilized, poorly managed, or would benefit from redevelopment. Our vertical integration here at Bravante Farm Capital that includes the ranch, packing, distribution and sales gives us a competitive advantage and keep profits at the ranch because we perform all other functions without markups – unlike the farms we buy that rely on third parties for all these functions that, in many cases, cost more because they too must retain a share of the crop revenues for profit.
Because the ranches we are targeting in most cases require added value and don’t yield to their full potential in the earlier years, they are in less demand so cost less than fully developed properties. Again, this is no different from apartment investing. You can either buy something that is old and in need of upgrades to add value to it at a discount, or you can pay full market price for a brand-new building that is fully occupied and market rents. By adding value to the farms we buy we increase the buyer pool once the asset has been improved and is running at full production (full occupancy at market rents in apartment vernacular). However, the answer to this question is also ‘no,’ because the returns on redeveloped farmland are so high relative to the kinds of returns you can get on other real estate asset classes that, while easier to sell for that very reason, they are also tempting to keep for lack of similarly lucrative investment options.
Redeveloping farmland appears beyond the ken of many investors. Why?
Well, one reason is what we addressed: Redevelopment means even after buying the land, you put more money in, need specialized skills to add value, and must wait to reap the maximum rewards. Full returns are years into the future on vine and tree crops, such as citrus or grapes, and no earlier than three years. This requires a patient investor. There are plenty of property deals in the marketplace with five-year exit plans, seven-year exit plans. Most investors understand apartments, and, hey, apartments will probably do well in coming years. So why buy a farm that must be made over? Hence the intensive price inflation and consequent reduction in both yield and equity appreciation of apartments versus farmland.
In general, the longer the wait, the higher the final yield?
For multiple reasons, yes. As with other value add real estate, the initial years return lower yields as the property undergoes improvement. What makes farmland stand out is that yields in later years far outperform those in other higher demand asset classes – like apartments or self-storage or industrial for example. This is a quirk of the way land is valued today – and that will change as more institutional and private equity shops enter the industry. Valued on a per-acre basis, little heed is paid to yield per acre, either by banks who provide the debt for farmland purchases, or by farmers who have been accustomed to paying per acre for generations.
Consequently, it is not unknown for farms to yield 25% of purchase price per year once their crop infrastructure has matured. As larger scale investors (institutional and private equity) enter the industry, their underwriting requires they utilize cap-rates to value land and as they are used to seeing sub-10% cap rates in most other real estate asset classes, so they are willing to pay more for farmland that has historically ever been paid. Furthermore, as I mentioned before, they will seek larger acquisitions and not the smaller land parcels we are assembling.
By consolidating multiple smaller farms into single large farms as we are doing in water-rich locations, we are building portfolios of land that will eventually be worth several multiples of what we are paying because, one, they will be attractive to large scale buyers, and two, because those buyers will use cap-rate calculations to value the land, not per-acre. But all this will take time, so, yes, particularly with farmland, the longer the way, the greater the wealth will be built.
What fees do you earn as manager of these farmland investments?
Our deals are structured so that my primary payday is on the same payday and terms as the limited partners or investors. Furthermore, our business is structured so that profits are maximized at the ranch level, not in the supply chain. It works like this. Prices for produce are set at the consumer level and out of that must be deducted all costs before profits are calculated. Those costs include distribution to the supermarket or store where they are eventually sold to consumers, packaging, and harvesting.
Most smaller farms – the ones we are targeting to acquire – subcontract those services from standalone specialty companies. Each of those subcontractors must make a profit so their prices to the farmer are inflated by the amount of that profit. By being vertically integrated i.e. by owning the harvesting, packaging, and distribution components of the farming business, we can, and do, run those at cost. This means that costs are minimized and profits are concentrated at the ranch level which benefits both us and our investors.
What kind of farms are you targeting to buy?
We look for older farmers in the last of multi-generational ownership, who is either selling out or whose heirs are selling because they do not want to assume operations. These farms are typically run with less-profitable crops, but current ownership is happy. They like what they are doing, are comfortable with their lifestyle, do not want to invest in the land either time, effort, or money. They have likely been operating their farms in the same way, farming the same crops, and using the same farming techniques for decades and have no interest – or wherewithal – to do otherwise. Again, you see this pattern in other real estate asset classes that have highly fragmented ownership like apartments. One or two generations ago, someone purchased an apartment building that has been kept in good shape but never upgraded to keep up with modern demands and rents have stagnated as a consequence.
Well, I have done this many times. Sometimes you have to call in demolition teams, and pull away chicken coops and whatnot, remedy any local conditions, perhaps amend the soil, put in latest irrigation systems and then re-plant, usually with citrus, or other fruits more profitable in current markets. Most of these people I hire, the contractors, are people I have relationships with and who know I will hire them again, so they do a good job, on time and on budget.
I would like to ask him that myself. At his scale and buying price, I assume he just plans to be a permanent investor, not one who executes long-term turnarounds for an exit, like we do. From what I read, he is testing new seed types and the like.
Everybody talks about inflation and land values now. Was is your take on the topic and farmland?
It is an old saw, but a true saw, that property prices tend to go up with inflation. Farmland values, like other commercial property, depend on net income. People have to eat, and I do not think they will stop liking fruit. If you are looking for an inflation hedge, farms are as good as any and the way we are playing it, better because we are also looking not only for increased revenues from sales (that will likely go up as inflation increases food prices) but because the land we buy is undervalued and will increase in value as institutional capital becomes more familiar with the asset class.
How is a farmland private-equity deal structured?
In general the splits between sponsors and investors are same as in many property deals. We are co-invested on equal terms and as sponsors are motivated to overperform through incentive payments – but only when we exceed investor goals and target returns. We aim to ramp up annual returns to investors to 6% and then ultimately up to 12% or more, and we take cuts of returns above those levels. But even when we hit and exceed target returns, the way are deals are structured is that we will not see our incentive payments until investors have received their payments first.
And management fees?
Modest. We aim to keep them under 2% and will defer our management fees until our investors have received at least a 6% return or yield.
How about leverage?
On farming, it is not as heavy as in apartments. Typically we borrow 50% to buy the land, and then use equity to develop or redevelop. As an operating enterprise, we can leverage up to 60% with equity at 40%.
What sort of returns are likely?
Well, our investment strategy is similar to a ground up or heavy value-add apartment deal; in the early years the returns are slim while we add value and invest in the land, but it then spikes at years three to four at over 12% and can then climb. We have seen 24% annual return on investment as an asset reaches maturity and can then stay that way if properly run. That’s one reason I never want to sell. You are selling when you should be living off the fruits of your labor.
What is your target rate of return for life of project?
We pencil our partnerships out at 15% IRR (internal rate of return). But that is assuming a fairly conservative exit or capital event like a refinancing. One nice thing is towards the later years of a project, we will not be forced or hurried to sell as institutional and typical private equity fund operations are. We expect to be heavy cash-flow positive and able to wait for the high bidder, and negotiate from a position of strength – or just hold on to the assets for cash flow long into the future.
Why do you want to from partnerships at all? Why not just buy the farms for yourself?
As I said, there is a unique, or even a chance-of-a-lifetime situation in these California ranches. I do not have enough capital to take advantage of all the situations opening up. So, I have two choices: I can watch some other investors buy the good opportunities, or I can raise money and at least participate in the great opportunities. So, in the end, I wanted to participate.