Rural Funds (ASX: RFF) has announced a large asset sale and more acquisitions. Are shares a buy after these changes?
Rural Funds Group is a real estate investment trust (REIT) that owns farms and leases them to tenants. Started in 1997, Rural Funds Management now manages $1.2 billion in agricultural assets across New South Wales, Queensland, South Australia and Victoria.
Rural Funds Asset Sale
The REIT has entered into agreements to sell its 17 poultry farms to ProTen Investment Management for $72 million.
One of the main reasons it sold these assets is that 11 of the poultry farms have old infrastructure with leases expiring in FY24. The renewal of these contracts would require constructing new infrastructure, which would be a material investment for Rural Funds.
Rural Funds Management (RFM) believes investment in natural resource intensive assets are more compelling. Continued investment in this sector is better suited to businesses with greater economies of scale.
Since 2003 when RFM acquired the assets, investors have received a compound annual return of 10.6% per year.
Rural Funds Acquisition
Rural Funds re-iterated it is deploying two investment strategies. One about productivity gains and one for higher & better use.
RFM has entered into options to acquire three cattle properties in Western Australia for $22.6 million which will be leased to Stone Axe Pastoral Company (SAP) to expand and diversify SAP’s Wagyu beef operations.
The REIT intends to improve the farm with grazing area development and additional irrigation. The leases will be the same as other cattle leases with a 10-year term and a rent review in year five.
RFM is also contracted to acquire the property Cygnet near Bundaberg, Queensland for $1.6 million to develop into a macadamia orchard and is seeking independent lessees for this development. RFM is also looking for additional macadamia development opportunities.
What Is The Effect Of This?
Rural Funds is still guiding a FY20 distribution of 10.85 cents per share, being a 4% increase from last year.
However, it will initially mean slightly lower cash net rental profit / adjusted funds from operations (AFFO) but in the medium term and long term it will deliver higher AFFO growth, which is what funds growth of the distribution for shareholders.
RFM pointed to the fact that its first cattle property, Rewan, has seen a return of 19.3% per year after being acquired in August 2016. The REIT has spent $1.3 million on capital improvements like more water points, the cultivation area and pasture improvement, which has improved cattle carrying capacity and the capital expenditure has attracted additional rent.
Summary
Based on the pre-open price, Rural Funds has a distribution yield of just over 6%. I would prefer Rural Funds owns assets that can grow asset values and the income over the long term, rather than remain static (or go backwards). So I’d rather own cattle properties over poultry.
But, Rural Funds now has a significant portion of its assets invested in cattle, so I’m hoping that it spends money on plant-based farms in the future.
Rural Funds and the reliable shares in the free report below could be good ideas for consistent and growing income.
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Disclosure: Jaz owns shares of Rural Funds at the time of writing, but this could change at any time.
