As Paul Pittman walked into his office that Wednesday morning in July 2018, he could tell something was very, very, wrong.
His company’s stock was crashing. Hard.
But as far as he knew, nothing bad had happened.
It had been business as usual for Farmland Partners (FPI) and Pittman, its CEO. As a real estate investment trust (REIT), Farmland Partners wasn’t in the habit of big changes affecting its business seemingly overnight. And its next earnings report was weeks away.
So what was behind this crash?
As it turned out, an anonymous poster had released a report on a popular investment site, claiming the company was at risk of insolvency. The result was a massive, short attack.
By the end of the day, Farmland Partners shares had fallen 39%.
But Pittman knew nothing in his company’s business had changed or warranted the selloff. So he embarked on a journey to clear his company’s name.
Here at Wide Moat Research, our goal is to sidestep risky bets and focus instead on the best and historically proven methods for earning income. We concentrate on fundamentals and do our due diligence to make sure that management teams can be trusted.
Today, I want to share the story of Pittman and Farmland Partners to show why it’s important to dig beneath the surface of sensational stories.
And tomorrow, I’ll share how another short is kicking up dust in the REIT space.
Before you believe a narrative you might read online – especially when it comes to risky bets like shorting a company… remember the lesson I’ll share today.
Why You Should Think Twice Before Shorting a REIT
As a REIT analyst, I was familiar with Farmland Partners even before 2018… It was a small business specializing in agricultural real estate.
And while I had some concerns about its dividend payout ratio, I’d done my research. And I knew it had a portfolio of incredibly valuable farmland.
The great thing about real estate is that as a tangible asset, it will always have value.
That’s why I knew better than to try to short shares of Farmland Partners.
You see, when you short a stock, you sell borrowed shares that you don’t own in hopes of buying them back later at a lower price.
Aside from the hassle of trying to time the stock’s movements, there’s another thing to consider with shorts. The most you can earn on a short is 100% – if the stock goes to zero. But the potential losses are limitless if the stock goes up.
While your short position is open, you’re on the hook for any dividends the company pays as well as interest charges for borrowing shares.
And with REITs, the risks are even more pronounced.
In most cases, REITs pay high dividends and have real estate portfolios that will never be worthless. That means it’s expensive to maintain a short and the potential reward is limited. Those are good reasons to think twice before shorting a REIT.
That’s something the people who shorted Farmland Partners failed to consider. Here’s how that ended up playing out for them…
Reading Isn’t Believing on the Internet
In the aftermath of the short attack, Farmland Partners responded by publishing an 11-page press release. It featured a detailed rebuttal of the false allegations and began buying back deeply discounted shares.
I recently interviewed Paul Pittman to see how Farmland Partners was doing nearly four years after that fateful day. Here’s what he had to say:
This all stemmed from a market manipulation, short and distort attack on the company that occurred in the summer of 2018. And for [those] new to the story, it was a hedge fund and their co-conspirator, in my opinion, who teamed up to write an article.
Short the company. Buy short put options on the company. Go out and write an article that said that me and the other senior members of management are corrupt and self-dealing and loaning ourselves money. And we were insolvent as a company and just all sorts of horrendous accusations.
The stock price the day of that attack dropped 40%.
After that, Farmland Partners was hit with a class action lawsuit. But Pittman chose to defend himself and his company… which unearthed the truth and earned the company a big victory.
Here’s how Pittman tells it:
First was the author of the article, which was published on Seeking Alpha, admitted last summer that they basically made it all up… So that was great because it cleared the air that we didn’t do those things. And the original author had said we didn’t do them.
And in the class action cases, we’ve just gotten summary judgment, which is a huge victory. The judge wrote an opinion that said none of the things we were accused of are in fact true, and that the company has basically a clean bill at health and free to go about its business, which is great.
It’s a complete win from our perspective. It was expensive getting there. But between those two things, we’ve largely recovered our reputation and our business.
Rather than going to zero, shares of Farmland Partners have more than doubled today since the short attack.
And Pittman said he’ll continue to pursue the hedge fund to recover the money spent on legal bills – and then some.
As for the author of the short report? According to the terms of a legal settlement, he agreed to pay Farmland Partners “a multiple of the profits” from his short bet as restitution for his false claims.
In today’s world of social media, it’s easier than ever for anyone to make up “news” that goes viral. That’s why it’s so important to think twice and get your facts straight before reacting, especially when it comes to making investment decisions.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
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Source: Wide Moat Research