Rural Funds Group (ASX: RFF) is an Australian agricultural Real Estate Investment Trust (REIT). Rural Funds Management Limited (RFM) is the external manager of RFF
RFF’s aim is to generate distribution growth of 4% per annum. It achieves this by owning and improving farms that are leased to good counterparties. The leasing arrangement is designed to provide a stable revenue stream to RFF, supporting regular distributions to investors, which are paid on a quarterly basis.
RFF lessees predominantly consist of corporate entities, representing 78% of FY22 forecast income. Many of these corporate entities are also listed on domestic or international securities exchanges, either directly or via their parent entity.
Private farming operations of varying sizes represent 11% of lease income. In addition, RFM entities (9%) and investment funds (2%) lease properties from RFF. Both of these arrangements provide RFM operating experience which can benefit RFF’s asset and sector due diligence, identifying and executing development opportunities and lessee selection and management.
RFF seeks diversification across both infrastructure predominant and natural resource predominant assets (see ‘Acquisitions and developments’ below) as well as by climatic zone. Climatic diversification moderates the likelihood of multiple lessees being exposed to adverse weather events at any one point in time (see ASX: RFF Climatic Diversification discussion paper 20 June 2016).
Further diversification is sought by commodity type and lessees.
Acquisitions and developments
RFF will pursue the acquisition of additional assets that grow the quantum and diversity of RFF’s earnings. The investment strategy is to invest across the full range of the asset continuum shown below1, with the objective of ensuring the asset mix can continue to fund distributions.
1The income and growth figures presented in have been provided to differentiate the profile of income and growth that can be derived from different assets. They are based on RFM’s experience and observations of agricultural lease transactions and historical rates of growth. They are neither forecasts nor projections of future returns. Past performance is not a guide to future performance.
Within various agricultural sectors, RFF is pursuing investment opportunities which may provide productivity gains or conversion to higher and better use.
Both strategies aim to lift the value and income earning potential of an asset. The productivity strategy achieves this objective by enhancing a property’s ability to produce a given commodity. Whereas the higher and better use strategy aims to transform the use of an asset to a different, more profitable commodity. Put simply, increased productivity or production of a more valuable commodity enhances the ability of the operator to generate higher profits, leading to a higher valuation and enabling the landlord to charge more rent thus supporting RFF’s distribution growth target of 4% per annum.