Listed in 2014, Rural Funds Group (ASX: RFF) (“RFF”, the “Company”) presents itself as a successful real estate investment trust (“REIT”) with an enviable portfolio of Australian agricultural assets that offers investors an attractive dividend yield without exposure to traditional farming business risks. Not all is what it seems.
Evidence suggests that RFF’s reported profitability had included A$ 28+ million of fabricated rental income paid to RFF by its two largest third-party lessees. We believe that RFF had artificially inflated its reported financial performance to raise cash from the capital markets for two reasons: (1) to finance its attractive ~76% payout ratio to shareholders; and (2) to conduct multiple nefarious transactions between RFF and RFF Management’s privately-held business, Rural Funds Management (“RFM”) in order to siphon assets into RFM for RFF Management’s own personal gains.
RFF’s shareholder dividends have accounted for only a small portion of the A$ 475 million RFF raised from equity issuances and borrowings since FY’14. In addition, evidence suggests that a portion of RFF’s cash proceeds were siphoned out of RFF into RFM. RFF Management has given little explanation why RFF would lend RFM or RFM Related Funds any money at all, let alone A$ 30+ million! RFF Management continues to tell investors that RFM’s sole form of compensation for managing RFF’s assets under management is ~1% fee per annum. This is far from the truth.
As we researched RFF, we became convinced that RFM was specifically designed to operate as a separate private entity to allow RFF Management to siphon cash into RFM. RFF Management operates both RFF and RFM, yet RFF Management owns 100% of RFM and owns less than 5% of RFF’s equity. To us, this immediately appeared as a clear conflict of interest between the incentive structures of RFF Management versus RFF minority shareholders.
RFF’s largest nefarious transaction appeared as an undisclosed dividend recapitalization of RFM’s newly acquired cattle asset, J&F, which included a A$ 30 million special cash dividend paid to RFM financed by borrowings backstopped by RFF’s A$ 75 million financial guarantee to J&F. In addition, RFF’s 1H’19 results disclosed that it was owed A$ 14.5 million from an RFM related party macadamia lessee which inexplicably did not appear on the lessee’s balance sheet. In total, we calculate that through these two transactions plus various ongoing cash expenses and fees since FY’14, RFF Management had siphoned A$ 86+ million into RFM at the ultimate expense of RFF minority shareholders.
We encourage all market participants to carefully review the publicly-available evidence we relied upon when formulating our opinion. We think it to be in the best interest of RFF minority shareholders to immediately commence an independent investigation into RFF’s reported rental income from its two largest third-party lesseess and into its two recent transactions that appear solely to benefit RFF Management’s private holdings.
We have witnessed scams with similar characteristics end poorly for minority shareholders. We refer readers to review two other Australian case studies, Frank Wilson from TFS Corp (Quintis) (ASX: QIN) and Mark Sowerby of Bluesky (ASX: BLA), whose respective frauds also included a combination of MIS-Fund schemes, inflated financial performance, exorbitant management fees, and various related party transactions between the public company and management’s private business.
We calculate that RFF Management overstated RFF’s net assets by 100% and that RFF’s true net assets figure was only A$ 268 million as of December 31, 2018, which would put RFF in breach of its recently increased minimum A$ 400 million net asset loan covenant. And as we have laid out in this report, we believe nearly 100% of RFF’s reported profits since FY’17 are attributable to either fabricated rental income or non-cash gains from dubious fair value changes applied to RFF’s assets.
We believe the outcome of corrected financial statements will reveal that RFF minority shareholders were always designed to be last in line when RFF’s capital raising days were over and the music stopped. Because of this, we are short RFF and believe RFF’s equity is ultimately worthless.
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