Ann: Bonitas litigation, page-116

Ok - just copy-pasting this here from Bucephalus website for (hopefully) constructive discussion:

Rural Funds Group (RFF AU): Issues to consider

Background
In August, Bonitas Research accused Rural Funds Group (“RFF”) of fraud and asset inflation. We have had a look and are very concerned. Criminal fraud is hard to prove, but we see a clear cut case of financial engineering and creative accounting being used to inflate asset values and line the pockets of the management company, (“RFM”).

Issues to consider
JBS deal

• RFF issued units to guarantee a loan that enabled RFM to get the equity in J&F for free. RFF has the downside, RFM the upside.
• RFM is effectively charging a fee on a credit instrument that helps RFF
• JBS Brazil has a history of corporate malfeasance

Assets

• RFM gets paid on based on the value of RFF's assets and is therefore incentivised to grow these as fast as possible.
• Capitalising costs increases the value of the assets
• Plant (ie almond trees, vines etc) valuations depend on how long they are expected to live
• The valuation of Water rights is subjective
• Management fees are rising as a % of revenue because revenue is not rising in line with asset values

Profit and Loss

• Capitalising costs reduces operating expenses and lifts profits
• Reducing depreciation helps boost profits. Extending the estimated life of any asset, eg an Almond tree, will reduce depreciation.
• If profits are higher than cashflow, distributions cannot be funded using recurring cash generation and must be funded from elsewhere

Valuations

• Management uses a DCF model to value the property based on their accounting methods not open market transactions
• Cutting discount rates and lifting pricing assumptions boosts asset valuations, irrespective of underlying cashflow
• The independent valuers, rarely visit the underlying properties. Instead, they base their valuations on management models

Supporting documentation- key passages highlighted
E&Y report
Retail offering
RFF AU FY 2019 accounts