Rural Funds Group (ASX:RFF) FY20 results update


by Clive Tompkins

Rural Funds Group Limited (ASX:RFF) General Manager - Investor Relations and Marketing James Powell discusses FY20 highlights, strategy, recent acquisitions and funding, and forecasts.

In August, the Rural Funds Group (ASX:RFF) reported its full year FY20 results. Highlights from the results included an increase to property revenue of 8 per cent compared to the previous financial year. The main reason for the increase was additional lease income generated from acquisitions throughout the period. In addition, earnings of the group increased by 80 per cent compared to 2019. The main reason for the increase in earnings was due to independent valuations which had been arranged on a number of the assets, including almond orchards, cattle properties, and water entitlements. Each of the group's assets are independently valued at least every two years.

Our adjusted funds from operations were in line with forecast. That is the cash that the group generates, from which we pay distributions. Our distributions were as well in line with forecast, being a 4 per cent increase on 2019, which is in line with our target.

As just articulated, the Rural Funds Group has a target distribution growth of 4 per cent per annum. Rural Funds Management, the external manager of the Rural Funds Group, seeks to achieve that distribution growth through structuring leases with appropriate indexation mechanisms, which include annual escalators, as well as, where appropriate, market rent review mechanisms.

The Rural Funds Group leases agricultural assets to good counterparts under long-term leases, and Rural Funds Management seeks to invest in agricultural sectors in which Australia has a comparative advantage, and in addition to that, sectors that the manager has operating knowledge. We also seek to diversify the portfolio climatically, so that not all of the agricultural assets are concentrated in any one climatic zone.

Recently, the Rural Funds Group announced that it was acquiring over 5,000 hectares of sugar cane properties in Central Queensland. The intention with these properties is to convert them to macadamia orchards. In addition to those assets, the Rural Funds Group has acquired cattle assets further north of the sugarcane properties, and they too are suitable for the conversion to macadamia orchards. RFM expects that the Rural Funds Group will be able to develop 5,000 hectares of macadamia orchards over approximately five years.

The macadamia sector is one that is appealing to Rural Funds Management. It has attributes which makes it attractive and competitive on a global scale. In addition to that, it's a sector in which Rural Funds Management has direct operating knowledge. And lastly, it can add to the climatic diversification of the overall portfolio of assets.

A portion of the funding for the macadamia developments is expected to come from the sale of the Mooral almond orchard. The sale of the orchard remains conditional to Foreign Investment Review Board approval. However, RFM has forecast that the sale will be complete by the end of the calendar year.

In regards to the outlook, the Rural Funds Group has provided forecast AFFO for FY21 of 11.7 cents per unit. From that, RFF will fund distributions of 11.28 cents per unit, the FY21 forecast, which is a 4 per cent increase on the prior year in line with our target, and the sixth consecutive year that the Rural Funds Group has grown distributions by at least 4 per cent per annum.