Episode 164 - Investing in Agriculture with Trevor Hightower
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Today on the show, we’re highlighting an asset class that we haven’t talked about much in the past.
Our host, Luke Roush will be joined by Trevor Hightower to talk about investing in agriculture.
The two will talk about how this unique industry brings a ton of potential for positive returns and redemptive impact. They’ll also discuss how God has worked in Trevor’s life through setbacks, mentors, and unexpected opportunities.
All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies and securities discussed. This podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization.
Episode Transcript
Transcription is done by an AI software. While technology is an incredible tool to automate this process, there will be misspellings and typos that might accompany it. Please keep that in mind as you work through it.
Joseph Honescko: Welcome back to the Faith Driven Investor podcast. Today on the show, we're highlighting an asset class that we haven't talked about much in the past. Our host, Luke Roush, will be joined by Trevor Hightower for a conversation on investing in agriculture. The two will talk about how this unique industry brings a ton of potential for positive returns and redemptive impact. Let's get into it.
Luke Roush: Welcome everybody to the Faith Driven Investor podcast. We are grateful to be here. We have a wonderful guest today in Trevor Hightower, a longtime friend, first time guest on the podcast. I am your host, Luke Roush. And welcome, Trevor.
Trevor Hightower: Luke. It's an honor to be here. Long time listener and it's great to be on this side.
Luke Roush: Wonderful. I must say, I'm really excited about today's call because of the asset class that Trevor and his partners are focused on, which is agriculture. And so, you know, most of the time when people think of investments, they picture urban areas, technology companies, Wall Street. But the team at Macfarlan is investing in ag. All of us eat every day. So this is a subject matter that we should care a lot about. But, Trevor, why don't you give us a 30,000 foot flyover of what the ag industry looks like and the role that Macfarlan plays in that arena?
Trevor Hightower: Yeah. Happy to. We first got focused on the asset class coming out of the pandemic, and historically, Macfarlan Capital Partners had invested and value-add office value-add retail real estate as a GP sponsor, doing deals deal by deal. Macfarlan Capital Partners always had a thematic focus where we could switch in and out of assets based on the right timing and the right conviction. We had conviction coming out of the pandemic. I think that many people had pretty early to [....] credit that inflation was coming. The other conviction that we had was we had a loss of conviction around the asset class that we had historically invested in, which is the office asset and retail asset class. And so to the credit of the team, when you're looking for a non correlated asset, an asset that doesn't trend with other assets on the return profile and as an inflation hedge, it's not too long before you get to farmland. Just when you look at the historical data markers, farmland has been tracked and [....] index for about 30 plus years. And the asset, as you mentioned, has very low volatility, historic returns that are on par with the S&P 500. So just under 12% returns in that same time with low volatility. And then that really fascinating, historical marker with farmland as you mentioned. And kind of why we got focused on it. Was it being a non correlated asset, one that is negatively correlated with public equities and then has zero correlation, interestingly enough, to other real estate asset classes. And the reason for that is not too complicated to understand. It's actually pretty straightforward. It's the macro drivers that drive the farmland asset class, which they're really redemptive macro drivers that the world needs its food, fuel and fiber. It's not a surprise to anyone listening that food, fuel and fiber is growing in its demand as world population grows. And then we have a growing middle class. What might be a surprise is on the supply side of farmland, there's the age old expression to buy land. They're not making any more of it in farmland. It's interesting that it's actually a decrease in supply for new development reasons and some water issues. There's a pretty rapid rate of decrease in supply in farmland. So when you combine growing demand and decreasing supply, you can see why there's been a pretty strong secular drive for both the appreciation of farmland and then how farmland generates income is through the yield of its crops, which has had to increase and has done so because of technology. As an investor, the yield is either from a lease. So this is why I call farmland the OG of real estate. Because on leased farmland, it's essentially a commercial real estate asset. You have, income driven by a lease or a rev share. And then the other source of income is the appreciation of the asset. So that's very similar to how a lot of real estate investors would think about a real estate investment. You just have, really strong risk adjusted returns that are supporting the farmland asset class.
Luke Roush: I think the analogy of commercial real estate, and this being a different type of commercial real estate, is really relevant to a lot of our listeners who may be really familiar with that asset class, maybe just share a little more on the specifics of how these investments might be structured. And just to orient our listeners.
Trevor Hightower: Yeah, they're very similar to real estate investments. Again, as I mentioned, let's just take a farmland asset that is a leased asset. One thing that is a difference between other real estate asset classes is the typical yield that you'd have from a lease is going to be lower than some of the other real estate food groups, whether that be multifamily or industrial or office. You're looking for leverage at a. Yield in the 4 to 6% range in farmland. So when you add a 4 to 6% yield from a lease with appreciation, that's where you're getting that low double digit return. And that's the historical return profile. You're just doing it in a safer asset. And that's what we really liked is a non correlated, safer asset that in a portion of a portfolio investors can get exposure to. But to dive in a little bit deeper, the two primary structures in farmland that you could set up are a lease or a rev share. The lease is going to be very similar to a commercial real estate asset. It's going to be varied in terms. The one nuance is the full lease gets paid upfront, typically so that the farmer pays the full amount in March, and then you have that lease that will extend for the period of the year, and that will be your income on the asset. The rev share model is taking a percentage of the yield of the crop and exposes the investor to commodity risk and yield risk. So the two factors that would drive the revenue of a farm on any given year is going to be commodity prices. And then the yield based on how much bushels of crop are harvested. And so in a rev share model, the investor is going to be exposed to a little bit more volatility, but be able to get more of a range. And ideally if you're going to go into a rev share model as the investor you've underwritten that you want to take on that additional risk because you think you're going to, on average, get a higher blended yield over the term of the investment.
Luke Roush: Yeah, that makes a lot of sense. And, you know, you've participated in some of the different food groups that you called out previously. I want to go to kind of your interest in this asset class. Like what's most compelling for you talked about just some of the inherent appeals of food, fiber and fuel, but maybe speak a little bit about your own personal journey, because I think that's helpful.
Trevor Hightower: Yeah. I mean, so you've had great leaders on this podcast that are in the small to medium sized business investment, like [Brent Beshore], and really trying to bring a redemptive solution to what is a major problem that needs to be solved in our country, which is the transfer of ownership of a lot of assets that are going to occur because of what it's typically called the silver tsunami. But that dynamic of a majority of assets being owned by baby boomer generation. And then in many cases, there's not the second gen or the next gen behind those assets owners that either have the skill or the will to take on the operation of the asset. Well, that dynamic is absolutely playing out in farmland in a very significant way, in a way that, to me is existential and important to our country and really the vibrancy of our food, fuel and fiber supply. So just to lay out some of those data points. The farmland is a $3.5 trillion asset class that is every bit as large as the US office market or the US multifamily market. The nuance in farmland that's very different from the other real estate food groups is the the lack of institutional capital in this space. So.
Luke Roush: Which is shocking to me.
Trevor Hightower: It's amazing. It is shocking. It has been changing and there's been more capital in the space. But yeah, as you know, Luke, it's less than 2% institutional capital that own, you know, up to $3.5 trillion of that, just the United States of farmland. So that means that 98% of U.S. farmland is owned by generational farmers, who really have been the backbone of our country. These are amazing men and women. I mean, I have such a growing respect and appreciation for the United States farmer and really what needs to continue as a majority of ownership, continuing to be in these incredible owners, if they have a solution for the next generation to come and farm. The issue is in many cases, the next gen doesn't have the skill or the will to farm. And so what you've been seen as aggregation of farmland by more successful, I'd say farmers who are able to operate at scale and use some economies of scale and use some really good technology and best practices to start to aggregate larger portfolios of farmland that they can operate. And that's the portion of the market that we're trying to support, and we're trying to support the best in class operators that are values aligned, that have a redemptive view of large scale farming so that we can continue to produce really great yields of food, fuel and fiber, but do so and a regenerative way. And that's only part of the solution. There's so many other really great redemptive solutions that. Are more micro in nature and those are needed. It needs to be multi-pronged solution to think about how the next generation of farming is going to occur. But that's what gets us really excited. Effectively, we can be growth equity partners to these best in class operators that are really trying to operate in a way that is maximizing the, financial, but also what's best for the land and the surrounding communities. And that's what we found in our first partner and what we love to do with, more partners going forward.
Luke Roush: That's wonderful. And talk a little bit about just your journey. I mean, you most recently were an entrepreneur or started your own business, and you've known the Macfarlan team for a long time, but maybe just talk a little bit about that transition from craft work to Macfarlan and what God taught you in and through that journey.
Trevor Hightower: Well, I really appreciate you asking. And it's, redemptive story. And I hope it's one that's an encouragement to other entrepreneurs out there or other investors out there. To me, it's a way to highlight and provide a great testimony of Dean Macfarlan and Mac Macfarlan, D. Macfarlan was the largest investor in Craftwork, the company that I co-founded, with my partner, Riley Dean, was an incredible investor in that he was very helpful strategically to the business. We met every month. He got into the details. He helped in so many ways, strategically and tactically in our business and made it very intentional effort to do so. At the end of every monthly call that we would have with Dean, his very next set of questions were around, how are you doing, Trevor, as a husband, how are you doing as a father? How are you doing as a leader in your community? How are you holding up with the stresses of what's going on in the business, and made it a very intentional effort to both, help steward the business and steward the entrepreneur. The best story around this is actually one of the most difficult, in that there was a investor meeting that Dean had asked me to prepare for, and I prepared for it like I was presenting in front of a a Wall Street bank. I mean, I was ready to go with my optimistic case, my base case, my pessimistic, and I hit that out of the park. I mean, I just I had a really good, convincing explanation of why a Craftwork was going to change the face of multifamily experience and hospitality. And he was very encouraging, had some points of feedback that were constructive and said, okay, Trevor, I'm going to take my investor hat off and I'm going to put my friend of Trevor hat on. And that's something that I'll never forget, and really something that if I'm ever in his position, I hope I can replicate to anyone that I invest in. And he asked me kind of some specific questions about my equity, and the company did some back in the napkin math and then just said something that I'll never forget. He said, you know, Trevor, I am so proud of you for what you've done in this company. And he said, I still think that there's a significant gap between what Craftwork would generate and the opportunity cost you have as an individual, because at that point there's been some dilution and and also some challenges in the growth of our company. And he was highlighting both. And he said, you can do whatever you want. But I just want to highlight that because the other context was this was the fifth year of the company's existence, and it had been really difficult on my marriage, and we weren't growing the way that we really wanted. I just had the burn the boat mentality as an entrepreneur, and I couldn't see any other path but to march forward. And this, our largest investor, was the one who actually told me to take a step back and see is it the right time that we look at, you know, at that? What would the selling parts of the business and closing the other part of it down? And I have to admit, it was very disorienting. It was the first time that someone I really trusted gave me permission to even ask that question, and I am so grateful for it. It was obviously very rare for an investor to take that approach. It took me about six months to actually agree that that was the right path forward, but it was something I'll never forget. We then went through a process where we made that decision six months later to start to sell parts of the business and roll the other part down to do what we call a redemptive close down. And we went through Praxis Accelerator, and we're just huge fans of Praxis, as I know you are. And they have the redemptive framework. And I remember we all just put our hands together and said, we want to with as much vigor and energy and vitality that we did in other parts and other stage of the business. Apply that same level of vigor to how we in the chapter. Which is, was really difficult, but essentially what it meant was what is the redemptive way to take care of our investors, our team, our stakeholders, our vendors in a way that was, you know, sacrificial. And I don't think that we did it perfectly, but I know that we did that. And the amazing grace behind it all was those were long, hours, long weeks. Didn't really have a lot of time to think about what was next. It was all in to try to do that well. Which was scary and scary for my wife. And so when it was all closed down, I started to think about what was next and kind of convinced that I was going to have to go back and get a real job. And the amazing grace behind it all was that's when Mac reached out and asked, hey, do you want to talk? Dean and I just had a really healthy transition where Dean had stepped into senior Advisor and Mac had stepped into managing partner of the firm, and they were both praying for a partner. And you know, the reason why grace is so transformative is it's undeserved. And it provides that clean fuel, because when you receive it, you just want to give back. And that's how I felt with even the opportunity to work with Mac as a partner and still have Dean involved as an advisor, was I had known both of these men and really their team for ten plus years. We'd been in the trenches together in different ways at craft work, and I had seen Mac and so many different settings and just I never had to underwrite their character, and I never had to underwrite their heart. And they already had an impeccable reputation. So it just felt like grace. And it's been why at this stage in my career, I've never been more energized. But it was through a lot of pain and a lot of uncertainty, and I wasn't sure how it was going to all play out. But obviously God was in it throughout the whole thing, even at the darkest time. So God works all things together for good, not in the way that we have planned, but in a way that forms us and forms our character and ultimately makes us open our hands and surrender more to him. And I can attest to that. And I'll throw out if there's anyone out there that is in that spot and needs someone to talk to, just reach out to me, because I think the pain and trials that we go through are our greatest superpower. Then to help others once you go through them. So reach out if I can help in any way.
Luke Roush: Trevor, I think you just signed yourself up for at least 20 hours of couch time bringing on investors that need, some formation or entrepreneurs and information. But that's that's awesome story. And I love that word of just kind of formation. That is what God intends to do in all of us, not in an episodic way, but in a continual way. And certainly that's evident in your story and the transition from craft work to Macfarlan. I'd love to wrap just with maybe just a couple of comments on you are very intentional, not just as an investor and some of the things that you talked about with farmland, but also as a husband and father, I'd love to hear your comments on coaching the journey that we're all on as followers of Christ. And then, you know, there's a way to tie in kind of the farming narrative and agricultural narrative of kind of crop formation, seeding, harvest. If there's some way to do that, then you get bonus points. But we won't we won't say that.
Trevor Hightower: Oh, I like that challenge. Yeah. I would say, thank you for that compliment. And I will say, you know, the the people to really ask are my wife and kids. And I heard a story of someone who was kind of lauded in the public. He was a pastor, and it was his funeral, and everyone was there and just saying so many great things about this guy. And then his son was there and said, you know, I love that all these great things are being said about my dad. I just I never knew that guy. And that would be a total loss for me. And I think it's just on my heart that I have a long way to go so that, you know, my kids and my wife are the ones who really get the best of me. But I had a awakening to that reality where I went through a life plan, and in that process, you identified what your giftings were and what your talents were, very much from the Scripture of the talents and the realization, which was really eye opening when I went through this was the bringing those gifts and my work. I was doing a pretty good job of bringing those gifts to my family. I wasn't it wasn't conscious that God had gifted me in different ways, that I was using it in my work and in business, that I should be using those very same gifts for my family. And I think a lot of guys and gals maybe miss that, that the gifts that really are apparent and that are making you succeed in business. Think about how you can apply those to your family. If you are a visionary leader which many listen to this that you are, no doubt about it. How how are you bringing your visionary leadership gifts to your wife and to your kids? How are you doing that? If you are an operational wizard, you know, how are you bringing your inner greater giftings to your home in a way that's blessing your family, and I'm definitely more on the visionary side. Thankfully, my wife is an incredible integrator, if you know those those terms visionary integrator. That's been a huge blessing to say, how can my wife and I really act more like a team in that way where I'm visionary and she's integrator, and so I've been more conscious to bring that gift into my family, which does look like, you know, how do I come to my wife with more ideas about how we can, you know, bless our kids, bless our family. And so I think it's kind of surprising, even as I talk about it now, that I didn't recognize it for so long. But the encouragement is, again, if there are things that you do really well in the work environment, how can you bring those same gift things to your family?
Luke Roush: That's great. Well, we always end each episode with a question about what God has been teaching you specifically in and through His word. And so I want to give you an opportunity to do that and share what God is telling you and speaking to you through His word.
Trevor Hightower: Yeah. Thank you Luke. This is where I will try to tie all of our passion around farmland and ag land together, along with how I've mentioned kind of key mentors in my life. And my mind and heart goes to Psalm one, which is blessed is the man who walks not in the counsel of the wicked, nor stands in the way of sinners, nor sits in the seat of mockers. But his delight is in the law of the Lord, and he meditates on that law day and night. He is like a tree planted by a stream of water, which yields its fruit in the season, and its leaf does not wither. And all that he does, he prospers. So ag land farmland has just so many references in Scripture, and the flourishing farmland is a byproduct of having the right source of nutrients and the source of water. What Psalm one reminds us is that the man who prospers is like a tree, is like a healthy, you know, farmland that is by the source of all things that is true and good and beautiful, which is God's Word. And I will say just to shout out Dean again, that dude, you cut him and he bleed Scripture. He just has a scripture memorized in a way that it just pours out of him. And I want to be more like that. Terry Luper as well, that the key mentors in my life, I come to them with questions and they give me scripture, and it's so ingrained in them because they've memorized and they studied and they're like this man, that they are not giving just their own opinion. They're giving God's word. I want to be more like that and aspire more to that and be this fruitful tree that is mentioned in Psalm one.
Luke Roush: Trevor, that's a good word for me, and I think for everybody listening to this podcast. So thank you Trevor.
Trevor Hightower: Thank you Luke.