INSIGHTS FROM OUR PRINCIPAL
“At Ranch Investor, we’re here to facilitate a better market”
Principal Colter DeVries, AFM, ALC
Overcoming Capital Challenges
Access to capital in grasslands is lacking. LTVs are reducing. The cost of capital is increasing. Liquidity is becoming more difficult. Cash flows (from livestock operations) have a low margin, and cap rates have parted from fundamental productivity (annual yield).
We have too many good operators, land stewards, and years of generational knowledge that need to be liberated from a low-yielding asset by separating the land from the operating entity. The land should be treated like its own Alaskan-styled Permanent Fund Dividend or Welfare check—a positive annual return for not doing anything.
Overcoming Capital Challenges
Access to capital in grasslands is lacking. LTVs are reducing. The cost of capital is increasing. Liquidity is becoming more difficult. Cash flows (from livestock operations) have a low margin, and cap rates have parted from fundamental productivity (annual yield).
We have too many good operators, land stewards, and years of generational knowledge that need to be liberated from a low-yielding asset by separating the land from the operating entity. The land should be treated like its own Alaskan-styled Permanent Fund Dividend or Welfare check—a positive annual return for not doing anything.
Beyond Investment Paradigms
Grasslands have perpetual unearned returns, which makes it nearly riskless.
Grasslands have perpetual unearned returns, which makes it nearly riskless. Because of this self-generating aspect, in the long term, ranchlands have uncorrelated returns (yield + growth) to government spending and the general US economy, all the while being highly correlated to inflation. This makes grasslands a candidate for not even including the risk-free rate of return in a capital asset pricing model.
Institutional and retail investors overlook this asset class; in fact, one should not even call a ranch an investment as so many brokers are willing to do. For most all involved, it is a lifestyle. Calling it an investment is just a sales pitch by guys who don’t know what investments entail. Many of these brokers don’t know what ranching brings either, supporting our belief that this is not an investment. You don’t even need to know how to operate it to own or sell it!
Regardless of features, benefits, location, and amenities, ranchlands are not an investment due to the challenges mentioned above. You buy art because you enjoy it, not because it will create modeled returns from yield and appreciation. Art is not a play on redevelopment, though you might get lucky when some no-name you’re holding becomes en-vogue.
Ranchlands are no different. They are simply passive, recreational, lifestyle real estate: buy and hold. I hope the market appreciates or becomes en vogue where you’re at, but buy primarily because it works within your lifestyle and finances at this specific moment.
The potential of investment assets.
Grasslands have appreciated quite well, are quite reliable, and have little volatility or correlation to the general economy; they have low beta and low sigma.
These aspects still do not qualify ranchlands as “investment grade,” and because of all this, the natural resource suffers.
Lower Manhattan real estate does not get neglected by absentee ownership, experience diminishing annual returns, or sit vacant for three decades until it sells at a predictably appreciated value to someone who is going to maintain that status quo.
Lower Manhattan real estate has too high an opportunity cost to not redevelop, improve annual yield, and optimize the features, benefits, and amenities that the location offers.
Liquidity is high for Lower Manhattan real estate, holding costs are high, and operating expenses are high. If you don’t keep up with obsolescence, depreciation, and maintenance, your asset and investment value will suffer significantly.
This is not the case with grasslands.
Overgrazing, mismanagement, and habitat loss are all too common—likely more common than not. I believe, in part, this is due to this asset not having the investment characteristics that sophisticated and institutional investors seek; this lack of liquidity and access to the larger capital markets hinders capital improvements and reinvestment for an asset that is traded based on a 10-20 time horizon but performs like an infinite annuity.
All too often, ranches are owned, operated, and leased by families, individuals, and absentee owners who do not reinvest in their assets; there is no alignment of interest with the indefinite abilities of this asset.
You don’t see this problem or phenomenon with commercial real estate or even farmland; commercial real estate and farmland are generally improved and maximized for optimal cash flows based on the highest and best use.
Related Posts
The Role of Market Makers
This is where we come in.
We are a market maker. We bring in more capital to ranchlands so that improvements can be made. When cash flows from operations improve, so do ecology benefits.
Every stock tank and rested pasture rotation benefits the wildlife as much as the rancher; this is the investment needed but should be borne by the operating entity (for now, let’s just disregard government subsidies for the “common good” and positive externalities. The free market has this covered).
As we begin to familiarize Secured Private Credit (SPC), you will see that “capital liberation” has more than just a positive effect on the rancher’s P&L. It leads to more employees, which is good for rural America, small schools, and agricultural communities. It leads to more cross-fences, pipelines, and stock tanks being developed for better rest-rotations of grazing pastures which benefit the wildlife.
I’m not foolish enough to believe that SPCs are some back-door silver bullet to social and ecological issues, but Freshman Econ 101 does show when you continually produce profits and incentivize reinvestment, a compounding growth effect takes place not only for the enterprise but for positive externalities.
The Role of Market Makers
This is where we come in.
We are a market maker. We bring in more capital to ranchlands so that improvements can be made. When cash flows from operations improve, so do ecology benefits.
Every stock tank and rested pasture rotation benefits the wildlife as much as the rancher; this is the investment needed but should be borne by the operating entity (for now, let’s just disregard government subsidies for the “common good” and positive externalities. The free market has this covered).
As we begin to familiarize Secured Private Credit (SPC), you will see that “capital liberation” has more than just a positive effect on the rancher’s P&L. It leads to more employees, which is good for rural America, small schools, and agricultural communities. It leads to more cross-fences, pipelines, and stock tanks being developed for better rest-rotations of grazing pastures which benefit the wildlife.
I’m not foolish enough to believe that SPCs are some back-door silver bullet to social and ecological issues, but Freshman Econ 101 does show when you continually produce profits and incentivize reinvestment, a compounding growth effect takes place not only for the enterprise but for positive externalities.