I’ve had a change of heart about a share idea due to ongoing troubles.
The business I’m not sure about any more is Vitalharvest Freehold Trust (ASX: VTH).
Vitalharvest is a real estate investment trust (REIT). It’s one of the few agricultural REITs on the ASX. The farms it currently owns are predominately citrus fruit and berries, which are all leased to Australian horticultural giant Costa Group Holdings Ltd (ASX: CGC). It has a profit-share agreement with Costa where it receives 25% of the operational profit from those farms.
Why I Changed My Mind
There has been some ongoing problems with Vitalharvest’s main (and only) tenant Costa Group Holdings Ltd (ASX: CGC).
Costa has produced a number of downgrades this year. Agricultural volatility is to be expected and can present opportunities, but a share suspension doesn’t evoke a lot of confidence.
It’s not Vitalharvest shares in the suspension, but the two are obviously linked because Vitalharvest receives 25% of the underlying operating profit as variable rent.
Costa is yet to announce what is in its trading update, but it’s unlikely to be good news at this stage. Whilst a worst-case scenario outcome is unlikely, question marks have been raised in the Australian Financial Review about Costa’s debt covenants which could require a capital raising.
In light of this, whilst Vitalharvest is so reliant on Costa’s rental income, it seemed like the prudent thing to do could be to sell for now and wait for the facts emerge.
Food demand may be growing but Vitalharvest has the operational risks of agriculture with its variable rent and the REIT risks of debt etc. Prior to this week’s news with Costa and the suspension I was willing to take that combination of risk with Vitalharvest, but this downgrade from Costa and the potential outcomes has made me uneasy to hold Vitalharvest.
I may decide to sell Costa too, depending on what’s in the update, whenever it is released.
I will probably redeploy my money into one of the reliable shares in the free report below.
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Disclosure: Jaz owns shares of Costa at the time of writing, but this could change at any time.
