AFR:
Rural Funds beefs up earnings guidance after new dealLarry Schlesinger Reporter Mar 2, 2020 — 7.30pm
Australia's largest listed rural property trust, Rural Funds Group, has upgraded its full-year earnings guidance after striking a new underwriting agreement with Brazilian meat giant JBS and avoiding any impact from the drought, bushfires or coronavirus. The upgrade accompanied a strong interim result – property revenue rose 22 per cent driven by the group's expansion into the beef cattle sector, rising rents and strong returns from development activities across its near $1 billion portfolio that also includes almond orchards and vineyards.
"It's a very pleasing set of numbers and we expect to report a similar result in the coming months," said managing director David Bryant. Mr Bryant said the trust was expanding its investments into macadamias through the conversion of former sugarcane farms and was also exploring investing in new sectors such as sheep meat." Lamb and sheep are very attractive ... sheep meat is at all-time high. It's a great industry to be in. I only wished we had bought farms in that sector 10 years ago," he said.
The reporting period though was marked by attacks on its manager, Rural Funds Management, by activist short-seller Bonitas Research, which alleged that RFM overstated the earnings and assets of the trust. In February, the Supreme Court of NSW found the Bonitas reports, which sent Rural Funds Group (RFF) shares crashing were "false and misleading". On Friday, the NSW Supreme Court will announce the quantum of damages it will award RFM.
Shares buck trendMr Bryant foreshadowed a potentially large legal bill for Bonitas. He noted that RFF shares, which ended Monday up 0.5 per cent, or 1¢, at $1.94 (on a day the ASX shed another 2 per cent) had not recovered to the $2.35 level they were at before the release of the first Bonitas report on August 6, amounting to about $140 million in lost market value.
Asked what was next for Bonitas, Mr Bryant said: "They will find out in due course."
Over the six months to December, RFF increased property revenue 22 per cent to $37.6 million with adjusted funds from operations (AFFO) per unit increasing 11 per cent to 7.1¢. The small upgrade to adjusted funds from operations from 13.4¢ to 13.5¢ per was based on the trust earning higher monthly fees by increasing the value of an existing limited guarantee it provides to J&F Australia, a subsidiary of RFM. J&F supplies cattle and feed at feedlots RFF owns and leases to JBS.
The increase of the limited guarantee to $100 million from $75 million –which will require shareholder approval in April – will enable J&F to increase its borrowing capacity and supply more cattle and feed to JBS, which can then increase its output to satisfy growing international demand for its Australian beef.
Seasonal variationsLooking across its operational performance, Mr Bryant said seasonal variations were not a direct risk to its earnings since none of its income was tied the operational performance of its tenants (unlike another trust, Vitalharvest, whose tenant is Costa Group). Nonetheless, none of RFF's 38 properties had been affected by the drought or bushfires.
Mr Bryant said only one lessee had fallen behind on its rent after their property received no rainfall. They would catch up on that payment with interest, he added. "This tenant accounted for less than 0.5 per cent of AFFO," Mr Bryant said.
He said there had been no impact on the trust's performance from the coronavirus, "nor should there be". RFF tenants include global beef group JBS, local beef producers AACo and Stone Axe Pastoral and winemaker Treasury Wine Estates. Mr Bryant said discussions with tenants indicated that exports into China were starting to flow again, "having all but stopped" in the first two months of the year.
Peter Davidson, head of listed property at Pendal Group, which has a 5 per cent stake in RFF, called the latest update a "good quality result". “The trust has confirmed that no properties were materially affected by drought or bushfire, which is testament to the strength of the production system as a whole. “Other positive operating features are the low payout ratio (76 per cent), low arrears on the rents and a long lease profile (11.5 years). “Finally, incremental capex is earning a healthy 7 per cent yield on cost.”
(20min delay)