Australia’s high quality of produce, high standards of food production and global recognition as a clean growing region, place the agricultural landlord Rural Funds Group (ASX: RFF) in an enviable position to deliver a sound (and growing) distribution stream.
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). An appealing attribute of RFF’s business is that, while its portfolio is diversified across sector and diversified across climatic regions, the agricultural risk of season to season harvest variation is essentially borne by the grower.
Revenues are derived from long-term lease rentals across five broad sub sectors; poultry infrastructure, tree nut orchards (almonds and macadamias), vineyards, cattle assets and cotton.
RFF’s more recent expansions have seen their portfolio of agricultural assets extend further into water rights as well as Queensland cotton. This further diversifies their portfolio and further demonstrates the Group’s mantra of ‘diversified by commodity and diversified by geography’/ (diversified climatic zones). The Group’s water entitlements currently stand at a little over 100,000 ML.
Inclusive of the recently acquired properties, RFF owns 36 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 13.1 years is compelling in the REIT sector, as is its occupancy, which sits at 100%.
Importantly, RFF’s gearing ratio is undemanding at 40.1 per cent while its payout ratio of 76% per cent allows for reasonable reinvestment to occur. This approach is consistent with RFF’s objective to provide investors with a prudent mix of both growth and income on their investment journey.
RFF is currently forecast to deliver around 9.6 cents per unit of income to investors over the coming 12 months. In line with the company’s objectives, 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 ‘growth in income’ as being increasingly valuable to investors in an environment of benign inflation.
Given the Group’s experienced management team, sound future prospects and solid (and growing) yield of around 5.5 per cent, we believe RFF presents a solid investment opportunity over a medium investment horizon.
Originally published in The Australian on Tuesday, 6 June 2017.