Rural Funds Group (ASX: RFF) is doing a capital raising to fund developments and acquisitions. Should investors buy into it?
Rural Funds’ capital raising
The farm real estate investment trust (REIT) revealed a $100 million capital raising through a 1 for 8.4 accelerated pro rata non-renounceable entitlement offer.
Initially, the money is going to be used for three different reasons.
First, the development of 1,000 hectares of macadamia orchards.
Next, the acquisition of cattle properties to be leased to corporate tenants. Those farms are likely to have similar productivity potential as Rural Funds’ existing cattle properties.
The third reason is buying 8,338 ML of water entitlements in the NSW Riverina for $38.4 million which will be leased to a private farming company for a term of five years. The REIT believes demand for secure water in this region will increase over the long-term, as permanent plantings such as almond orchards continue.
Financial impact
Including the impact of the acquisition of the water entitlements, Rural Funds is expecting FY22 forecast adjusted funds from operations (AFFO) – the net rental profit – to be 11.6 cents per unit with additional earnings from acquisitions and finalisation of the macadamia lease.
It also confirmed that the distribution will be 11.73 cents per unit, representing a 4% increase on FY21.
This will also decrease the debt levels on the balance sheet, pro forma (calculated) gearing as at 31 December 2020 will be 23.9%, compared to the target of 30% to 35%.
Should investors be interested in the raising?
Certainly investors should think about it. For starters, the Rural Funds leadership are taking part.
Rural Funds Management and Managing Director David Bryant collectively hold approximately 4.5% of Rural Funds and committed to take up a minimum of $1.5 million. RFM Chair Guy Paynter and directors Michael Carroll and Julian Widdup hold 0.6% and have committed to take up their entitlement in full, amounting to $0.6 million.
The offer price is $2.47, which is a 5% discount to the last closing price and offers a 4.7% distribution yield on the FY22 forecast.
It’s not a bad yield at all. I think Rural Funds might be the best REIT on the ASX. However, the raising price is higher than what the share price has been at for most of 2021 except for the last month or so. It’s not a bargain offer – and at a sizeable premium to the underlying value (the net asset value per unit). The distribution being higher than FY22’s forecast AFFO is also not exactly a positive, hopefully that is reversed in FY23.
If you want more exposure to Rural Funds, then I think it would be a good offer to take part in. However, I’m waiting for a cheaper entry price that’s closer to the NAV before buying more.
There are other ASX dividend shares I’m looking at for income.
