ASX code: RFF
Share price: $1.65
Industry: Real Estate
Forecast FY2017 Distribution: 9.6c
It’s a rare situation for a large collection of high quality agricultural assets to be flying under the radar in Australia. However, this is arguably the case for emerging agricultural-focused REIT, Rural Funds Group (ASX: RFF).
RFF is a real estate investment trust (REIT) which owns a diversified portfolio of high quality Australian agricultural assets that are leased to experienced agricultural operators (RFF’s tenants).
Revenues are derived from long-term lease rentals across four broad sub sectors; poultry infrastructure, tree nut orchards, vineyards and cattle assets.
RFF recently raised $61m to fund the acquisition of three cattle properties, the development of a further 1000-hectare almond orchard and three macadamia orchards. In doing so, the Group expanded its presence into a new sector and climatic zone.
We believe the rationale for the acquisition to be sound as, in aggregate, it will drive per unit earnings growth, extend its lease expiry profile and add diversity to the group’s operations. RFF’s valuable water entitlements also increased as a result of the acquisition, up approximately 10 per cent to 66,000 ML.
Inclusive of the recently acquired properties, RFF owns 34 properties spread across Queensland, NSW, Victoria, South Australia and Western Australia.
In terms of portfolio metrics and fundamentals, we believe RFF is well positioned to deliver on its objectives over the long term. The Group’s weighted average lease expiry (WALE) profile of 15.2 years is amongst the best in the REIT sector, as is its occupancy, which sits at 100%.
Importantly, RFF’s gearing ratio is sound at 30.6 per cent while its payout ratio of 78 per cent allows for reasonable reinvestment to occur. Such a strategy suggests RFF is positioning itself to provide investors with a sound mix of both growth and income in the years to come.
RFF is currently forecast to deliver about 9.6 cents per unit of income to investors over the coming 12 months. Furthermore, we expect the income stream to investors to continue to grow by approximately 4 per cent per annum over the medium term. We believe this aspect of income growth is increasingly valuable in an environment featuring low levels of inflation.
Given the Group has a high quality management team, sound future prospects and a solid yield of about 5.8 per cent, we believe RFF presents as value for investors with a reasonable time horizon.
Adrian Ezquerro is a senior analyst at Clime Investment Management.
Originally published in The Australian, Tuesday 16th August