Rural Funds Group's latest game of chicken with investors

From AFR
https://www.copyright link/companies/agriculture/rural-funds-group-s-latest-game-of-chicken-with-investors-20191126-p53e5b

Kaizen letter to RFF
https://drive.google.com/open?id=0B0Hte9gyd-9KV0ZGRGo2cGJ2S3VaN0Y1Um9UODA0aFpqalRJ

RFF unitholders certainly have had it better than those of RFP

Large RFF volume @ $1.92 after the close today as well

Jemima Whyte

Nov 27, 2019 —12.00am

Short seller targetRural Funds Group is accused of selling the assets of its listedsatellite RF Poultry far too cheaply, raising questions about thecompany's asset valuations and the conflicts of a shared board.

Ahead of a keyshareholder meeting on Thursday, Kaizen Capital, which owns 19.5 percent of RF Poultry, has written to the National Stock Exchange-listedcompany's board, saying it will vote against a resolution to sell thecompany's assets to ProTen, a private chicken processor backed byFirst State Super.

The ProTentransaction "significantly undervalues" the 17 chickenfarms leased from Rural Funds Group and operated by RF Poultry, andis the result of an "opaque, inadequate and flawed saleprocess,'' the letter says.

Rural Funds managingdirector David Bryant rejected the claims, saying he was confidentthe transaction was in the best interest of all unitholders.

Rural Funds Groupleases its assets to RF Poultry. The two groups are managed by thesame responsible entity, Rural Funds Management, which charges RFPoultry a management fee equal to 5 per cent of RF Poultry's annualoperating expenses.

"We disagreewith everything [Kaizen Capital] is saying ... we are very confidentthe unitholder vote will vindicate our position," Mr Bryantsaid, adding that despite the potential for conflicts of interest,the board had acted in the best interests of both groups ofunitholders.

Rural FundsManagement managing director David Bryant says despite the potentialfor conflict, the board acted in the interests of all unitholders.

The 17-page letter,obtained by The Australian Financial Review, also alleges that aconflicted board has failed to act on options that could have boostedRF Poultry's profits, in particular seeking greater rent relief fromits landlord Rural Funds Group as outlined in the lease agreements.

"We areconcerned that conflicts in the boards have led to decisions thatfavour Rural Funds Group and Rural Funds Management over Rural FundsPoultry," the letter says.

"We areconcerned the same board of Rural Funds Group/RF Poultry isconflicted and has not enacted the rent reviews and reductionsbecause it would impact the revenues and balance sheet of Rural FundsGroup (the larger entity) - the lessor."

The Kaizen letter isthe first time that allegations of potential conflicts of this naturehave been raised against the board, and no allegations of that naturehave been made by regulators.

Mr Bryant said theanalysis was "shallow" and failed to take into accountasset writedowns and depreciation. He said "the landlord hashonoured the terms of this lease absolutely".

Kaizen says rentsshould be 49 per cent lower, based on agricultural yields typicallygenerating yields of between 7 per cent and 8 per cent. RFF ischarging 15 per cent for base rent and 18.8 per cent if maintenancecapex is included.

If RFP paid a 7.66per cent yield on RFF's assets, rent would fall from $10.7 million to$6.28 million, the investor says, which would turn the company'sprojected $1.8 million loss to a $2.6 million pre-tax profit.

In its explanatorymemorandum, RF Poultry said it wrote to Rural Funds in August tobegin the rent review process, on the grounds of "a materialpermanent change in the chicken growing gross margin, which must bethe result of a material adverse event''.

In response, thecompany changed the timing of rental payments from quarterly inadvance to quarterly in arrears for one year.

Since 2015, RuralFunds has increased rent from just under $10.4 million to just above$10.7 million in 2019, the letter says. Over the same period, RFPoultry's margins have fallen from 8 per cent to negative 8 per cent,while earnings before interest, tax, depreciation and amortisationhas fallen from a profit of more than $2 million to a loss of justunder $2 million.

Mr Bryant rejectedKaizen's claims the ProTen deal was a "firesale" on thebasis that the ProTen offer was at a premium to the net tangibleassets of the trust.

In August, RuralFunds Group was the target of a short report by Bonitas Research,which claimed the company was overstating its assets and its equitywas "ultimately worthless".

Rural FundsManagement has commenced legal proceedings against Bonitas Researchin the NSW Supreme Court for alleged multiple breaches of theCorporations Act and the Australian Securities and Investments Act.