Rural Funds Group (ASX:RFF) FY18 Results

Interviews

by Jessica Amir

Rural Funds Group Limited (ASX:RFF) General Manager - Investor Relations and Marketing, James Powell, talks FY18 results, the impact of the drought, and guidance for FY19.

The Rural Funds Group Limited (ASX:RFF) is an agricultural property trust. RFF, as is the ASX code, was listed in February 2014 and is diversified across six sectors, and invested in 44 different properties. Lessees and counterparts include ASX listed and other corporate operators, such as Treasury Wine Estates Limited (ASX:TWE), Olam, Select Harvests Limited (ASX:SHV) and Baiada Poultry Pty Limited.

FY18 was a good year for the Rural Funds Group. AFFO and earnings were up 26 and 29 per cent respectively. The AFFO per unit of 12.7 cents and the distributions per unit of 10.03 cents, were in line with our previous forecast. Distributions per unit had increased four per cent over the prior corresponding period, which is in line with our target growth of four per cent per annum. Total unit holder return for FY18 was 20 per cent.

Thinking about the adjusted funds from operations, there were three main drivers for that positive result. The first is an increase in rent by virtue of lease indexation mechanisms, either CPI linked or fixed, which are included in all of our leases. Secondly, the Rural Funds Group funded and continues to fund expenditure on the Kerarbury almond orchard development, a 2,500 hectare almond orchard, which is nearing its completion. And finally, RFF acquired three cattle properties referred to as the Natal aggregation in northern Queensland, in December 2017. Thinking about the in earnings of RFF - that adds to the property revenue increases, which I’ve just described, through non-cash items. And those were primarily positive independent valuations for a number of properties, within the Rural Funds Group.

The Rural Funds Group has a policy to revalue each of the assets within the portfolio independently, at least once every two years. During FY18 there are a number of positive property revaluations, which occurred. Some of the highlights included three almond properties, which the Rural Funds Group owns, which in aggregate received a valuation uplift of eight per cent. RFF also owns three macadamia properties, which while smaller in value, received a valuation increase of 37 per cent. And finally one of the cattle properties, which RFF owns, went up 17 per cent. Primarily as a result of the productivity development, which has occurred on that property and therefore, the increased productivity of that farm.

The capital structure of the Rural Funds Group remains healthy. Gearing is at 25 per cent, which is compared to a target of 30 to 35 per cent and that’s a pro forma number following the equity raising, which occurred in July 2018. In addition to that, we have $80 million of headroom on our debt facility. And 55 per cent of our debt is currently hedged with the outright level of hedges, increasing over the next three years.

In 2016, RFM’s manager for the Rural Funds Group published a climatic diversification strategy. This paper outlined the intent to invest in varying rainfall zones, to reduce the likelihood that our lessees would all experience either wet or dry conditions, at the same point in time. Since 2016, RFF has acquired 13 properties in Queensland. For those properties, they are located in a high rainfall zone and those lessees have experienced average, or close to average seasons. If you think about the sectors in southern Australia, which are invested, it consists primarily of almonds, poultry and vineyards. And all of those assets are underpinned by high security water types. So for the Rural Funds Group and their lessees, it is business as usual.

FY19 guidance is adjusted funds from operations of 13.2 cpu and distributions of 10.43 cpu and that’s a 4 per cent increase on FY18.


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